Ascott Residence Trust - DBS Research 2017-07-21: Book The Next Share Price Rally

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ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Book The Next Share Price Rally

• 2Q17 DPU of 1.84 Scts (-14% y-o-y) in line with expectations due to drag from recent rights issue.
• Stronger 2H17 on the back of announced acquisitions.
• Re-rating of stock to continue on the back of expected resumption of DPU growth next year.

Uplift from incoming tide. 

• We maintain our BUY call on Ascott Residence Trust (ART) with a revised Target Price of S$1.28. 
• We had previously highlighted the removal of the stock overhang – from the completion of the recent rights issue to fund the acquisition of Ascott Orchard Singapore – as a re-rating catalyst. While ART has since rallied by 10%, we believe the rally still has legs. 
• With the Singapore hospitality market expected to recover next year, based on historical correlations, the positive sentiment on the sector should lift all boats including ART.

WHAT’S NEW

2Q17 DPU impacted by recent rights issue 

• As expected, ART reported a weak set of results with 2Q17 DPU down 14% y-o-y to 1.84 Scts. This took 1H17 DPU to 3.36 Scts (-13%), which represented 50% of our FY17F DPU forecasts and which was in line with our expectations.
• The decline in 2Q17 DPU was mainly due to the impact of the recent rights issue and negative carry as the acquisition of Ascott Orchard Singapore will only be completed in October 2017.
• Stripping out the impact of one-off items as well as the rights issue this year and equity placement last year, 2Q17 and 1H17 DPU would have risen by 8% and 6% y-o-y, respectively.
• Underlying 2Q17 NPI was up 2% y-o-y mainly due to the acquisition of Sheraton Tribeca New York in April 2016 and Citadines City Centre Frankfurt and Citadines Michel Hamburg in May 2017. The results would have been better if not for some margin compression primarily coming from the weaker Singapore operations. Overall 2Q17 revenues grew 4% y-o-y.

Mixed performance across the core markets 

• Gross profit contribution from Japan (14% of 2Q17 gross profit) was down 16% y-o-y in SGD and JPY terms, mainly due to the divestment of 18 rental housing properties. However, underlying gross profit stripping out these asset sales was still down 5% y-o-y in JPY terms as RevPAU (-6% y-o-y) was under pressure due to heightened competition and new supply in Tokyo and Kyoto.
• Meanwhile the USA portfolio (12% of 2Q17 gross profit) reported an 8% fall in gross profits in SGD terms (-9% in USD terms) as revenue per available unit (RevPAU) in USD fell 4%. However, excluding noncash operating expenses, gross profit would have been up 2% y-o-y in USD terms.
• Vietnam (11% of 2Q17 gross profit) had a strong quarter, with gross profit in SGD and VND terms rising 22% and 21% y-o-y, respectively. The robust performance was driven by a 23% uplift in RevPAU on the back of higher corporate demand as well as higher ADR’s for Somerset Ho Chi Minh City post the completion of refurbishment in 1Q17.
• China (10% of 2Q17 gross profit) staged a turnaround with gross profits up 28% and 24% y-o-y in CNY and SGD terms, despite RevPAU rising by only 1% y-o-y to RM413. The improved profitability was a result of lower business tax, property tax refund and depreciation expenses.
• Income from UK (10% of 2Q17 gross income) was down 9% y-o-y, mainly as a result of the depreciation of the GBP. Underlying gross profit in GBP terms was actually up 3% y-o-y on the back of higher leisure demand which resulted in RevPAU rising 4% y-o-y.
• The Australian operations (7% of 2Q17 gross profit) reported flat gross profit in SGD mainly due to the appreciation of the AUD. Underlying profits in AUD terms was down 4% y-o-y as a consequence of 1% lower RevPAU (mainly related to the Perth property) and higher operating costs.
• Singapore (7% of 2Q17 gross profit) had a lacklustre quarter, with gross profits down 11% y-o-y. This was because of 
  1. subdued corporate activity from the oil and gas, and financial sectors, 
  2. pricing pressure from increased room supply which resulted in a 5% drop in RevPAU, and 
  3. boost to 2Q16 income arising from a property tax refund.

Gearing expected to stabilise around 36-37% level 

• Following the recent rights issue, asset disposals and slight uplift in valuations (S$6m surplus mainly related to higher values for the Vietnam and UK properties) gearing fell to 32.4% from 41.1% as at end 1Q17. However, with the acquisition of DoubleTree by Hilton New York, Times Square South, we expect gearing to stabilise around the 36-37% level.
• Average costs of debt stood at 2.4% slightly up from 2.3% at end 1Q17. The proportion of fixed-rate debt was 85%.
• On account of a higher number of shares on issue and currency fluctuations, NAV per unit fell to S$1.23 from S$1.29 at the end of 1Q17.

Two-year DPU CAGR of 3% and TP lifted to S$1.28 

• After incorporating the acquisition of DoubleTree by Hilton New York, Times Square South, the recent disposal of two Chinese properties and weaker RevPAU in New York due to an increase in supply, we have raised our FY17F DPU by 2% but trimmed our FY18-19F DPU by 1%. Based on our new estimates, we estimate ART to deliver a two-year DPU CAGR of 3% between 2017 to 2019.
• We have also raised our DCF-based TP to S$1.28 from S$1.16 after incorporating the acquisition of the New York hotel and rolling forward our valuation to FY18.

Stronger Second Half 

• 2H17 earnings should be stronger compared to 1H17. This is underpinned by the impact of the recently announced acquisitions but also the usual seasonal impact especially in the US market.
• In addition, sentiment has improved in Europe, which should translate to higher demand for ART’s rooms.
• ART also guided it is in the process of renegotiating new master leases for four French properties and one asset in Singapore, which represent around 5% and 3% of income, respectively. However, it does not expect any changes that would materially impact its earning post the renewal of these leases.

Maintain BUY 

• We maintain our BUY call with a revised Target Price of S$1.28 given an expected 12-month total return of around 13%.
• We believe ART should trade close to 1x book value, given it has demonstrated the ability to crystallise its book. In fact, in recent times ART has been able to sell its properties at 12.5-69.0% to book value.

Where we differ – Ability to crystalise book value. 

• Consensus has a HOLD call with an average TP below ART’s book value, given concerns over the near-term decline in DPU. 
• However, in our view, this has already been well flagged and we believe the more critical factor that should drive ART’s share price is the trust’s more aggressive execution over the past year of selling properties that have limited growth and recycling the proceeds into better yielding assets. This ability to sell its properties above book value, and at the same time reduce its reliance on equity raisings to drive growth, we believe, warrants ART to trade around its book value as implied in our TP of S$1.28.

Resumption of DPU growth. 

• Beyond evidence of ART crystallising its book value, we believe the resumption of DPU growth from FY18 onwards as ART benefits from the full-year contribution of its recent acquisitions should prompt an additional re-rating of ART’s share price. 
• We have forecast two year DPU CAGR of 3% over 2017-2019.

Key Risks to Our View: 

Oversupply and forex volatility. 

• The key risk to our call is potential oversupply in ART’s key markets as well as impact from forex volatility. 
• These risks are mitigated by ART’s diversified portfolio, with no country contributing more than 20% of the group’s net property income.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-21

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.28 Up 1.160