Ascendas Hospitality Trust - DBS Research 2017-06-19: Value For Money

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ASCENDAS HOSPITALITY TRUST Q1P.SI

Ascendas Hospitality Trust - Value For Money

• 4Q17 DPU of 1.37 Scts (+5.4% y-o-y) ahead of expectations.
• Improved performance across all markets except Singapore.
• DPU growth to continue into next year.

Attractive yield and discount to book value. 

• We maintain our BUY recommendation with a revised TP of S$0.88. 
• We believe at current level, Ascendas Hospitality Trust (ASCHT) offers a compelling yield in excess of 7% which is based on a 95% payout ratio. In addition, the stock trades at a discount to its NAV per unit of S$0.92.

Where we differ (DBS is the sole broker) – Misunderstood exposure. 

• Ascendas Hospitality Trust ASCHT’s share price has largely tracked the performance of other Singapore-focused hospitality REITs which have faced the challenge of an oversupplied market although c.87% of the trust’s FY17 NPI are sourced outside Singapore. 
• In addition, the contribution from its sole Singapore property is largely derived from a fixed rental income stream. Thus, we believe there is an opportunity for investors to gain exposure to the growing Australia and Japanese hospitality markets at attractive valuations.

Acquisition capability enhanced due to low gearing and Chairman with extensive hospitality experience. 

• With gearing of only c.32%, ASCHT is in a strong financial position to pursue debt-funded acquisitions. 
• In addition, we believe the ability to execute on non-organic opportunities is enhanced by having Mr Miguel Ko as Chairman of ASCHT. Mr Ko, who is currently the CEO of ASCHT’s sponsor, was formerly the Chairman and President of Starwoods Hotels & Resorts (Asia Pacific Division) and Deputy Chairman and CEO of CDL Hotels International.

WHAT’S NEW

Strong finish FY17 DPU ahead of expectations 

• ASCHT had a strong finish to the year with 4Q17 DPU rising 5.4% y-o-y to 1.37 Scts. This resulted in FY17 DPU of 5.68 Scts (+5% y-o-y), which was above our original 5.52-Sct estimate.
• The outperformance was largely attributed to higher contribution from ASCHT’s Japanese operations which benefitted from the strong performance of Hotel Sunroute Osaka Namba.

Japan kicking goals 

• ASCHT’s Japanese operations continue to do well, with 4Q17 and FY17 NPI rising 23% and 35% y-o-y respectively.
• The stronger contribution was largely attributed to a stronger JPY as well as variable rent from Hotel Sunroute Osaka Namba on the back of strong underlying performance of the property. Hotel Sunroute Osaka Namba benefitted from an improved rent structure, with the fixed rental component 13% higher than the previous agreement.
• The performance from Japan was tempered by a slight 2.4% y-o-y decline in 4Q17 RevPAR at Oakwood Apartments which was impacted by fewer events at the nearby Tokyo Big Sight.

Growth in Australian operations 

• On the back of the appreciation of the AUD versus SGD as well as a 6.3% y-o-y growth in NPI in AUD terms, NPI from the Australian properties rose 12.9% y-o-y in 4Q17.
• On a full-year basis, NPI from Australia rose 5.7% y-o-y in SGD terms.
• The stronger end to the year was attributed to stronger demand at Pullman Sydney Hyde Park, a new aircrew contract at Novotel Sydney Central and stronger conferencing business in Brisbane. Overall this resulted in 4Q17 RevPAR jumping 6% y-o-y to A$159 with both occupancy rising 3.9ppt to 87.7% and averaged daily rate (ADR) increasing 1.7% to A$182.

Stronger demand in China 

• As a consequence of stronger demand in Beijing as well as Ibis Beijing Sanyaun benefitting from the China Lodging Group’s loyalty programme, 4Q17 RevPAR rose 0.7%.
• Due to effective cost control, 4Q17 NPI rose a stronger 12.8% y-o-y, taking FY17 NPI from China to S$7.9m (+8.4% y-o-y).

Subdued Singapore performance 

• Owing to the oversupplied market resulting in less variable rent, NPI from Park Hotel Clarke Quay fell 17% and 9.2% y-o-y for 4Q17 and FY17 respectively.

Fall in gearing on the back of increase in valuations 

• On the back of a 6.5% y-o-y increase in property valuations, ASCHT’s gearing fell to 32.2% from 32.7% as at end March 2017 and 33.3% as at end 31 December 2016.
• The uplift in property values was largely attributed to an increase in the value of ASCHT’s Australian (1-23% increase in AUD), China (3-9% increase CNY) and Japan (2-9% increase in JPY) portfolio on the back of higher income and approximately 25bps cpa rate compression for ASCHT’s Sydney CBD properties.
• Nevertheless, ASCHT recorded a 7% and 9% decrease in the value of its Novotel Sydney Novotel Sydney Parramatta and Pullman and Mercure Brisbane King George Square properties respectively. The declines were due to the impact of lower income as the properties faced competition from new supply.
• Meanwhile, ASCHT’s sole Singapore property recorded a 1% drop in value due to the impact of an oversupply situation in Singapore.
• Net asset value per unit now stands at S$0.92 versus S$0.86 as at end-31 March 2016.
• ASCHT’s average interest cost also declined y-o-y to 2.9% from 3.4%, largely due to a higher proportion of JPY debt.
• The percentage of fixed rate debt was also maintained at a high level at 78.3%.

Positive outlook ahead 

• Going into FY18, we believe ASCHT will continue to deliver a steady DPU performance as it benefits from the growth of inbound tourists into Australia and Japan, albeit tempered by some competition it may face from its properties in Brisbane and suburban Sydney which faced competition from increased supply. 
• ASCHT’s earnings should also remain anchored by its Singapore property which provides a higher level of fixed rental income that grows by 3% per annum.

Valuation

• To account for the better-than-expected FY17 results, and expectations of a stronger AUD, we raised our FY18-19F DPU by 7-8%. This also leads us to raise our DCF-based TP to S$0.88 from S$0.84.

Maintain BUY, revised TP of S$0.88 

• With an expected 16% total return over the coming 12 months (9% capital upside and 7% yield), we maintain our BUY call with a revised TP of S$0.88.

Key Risks to Our View

Significant drop in AUD/JPY and demand/supply imbalance. 

• If the AUD/JPY drops significantly from current levels and there is excess supply in ASCHT’s respective markets, there will be downside risks to our DPU estimates and ASCHT may continue to trade at a discount to book value.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-06-19

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.88 Up 0.840