Ascendas Hospitality Trust - DBS Research 2017-12-15: Opportunity Beckons

Ascendas Hospitality Trust - DBS Vickers 2017-12-15: Opportunity Beckons ASCENDAS HOSPITALITY TRUST Q1P.SI

Ascendas Hospitality Trust - Opportunity Beckons

  • Ascendas Hospitality Trust (ASCHT)’s 2Q18 DPU of 1.42 Scts (+3% y-o-y) below expectations.
  • Growth in DPU on the back of a strong AUD offset by lower contribution from Japan.
  • DPU to take a breather but yield differential to other hospitality REITs too wide.



Attractive valuations. 

  • We maintain our BUY recommendation with a revised TP of S$0.91. While we expect Ascendas Hospitality Trust’s (ASCHT) DPU to take a breather in FY18 after a strong run, we believe the trust still offers a compelling yield of 6.6%, which is 0.8% higher than other hospitality REITs, above its average differential spread of 0.6% historically.


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

  • Ascendas Hospitality Trust (ASCHT) has been ignored by many investors due to its small market cap and its large exposure outside Singapore.  We believe this is an opportunity, as its key markets of Australia (c.51% of 1H18 NPI) and Japan (c.26%) are in a secular up trend over the medium term, thanks to their relatively low penetration of international visitors. For example, a small country like Singapore attracts c.16m visitors annually versus Japan and Australia with around 24m and 8m, respectively.
  • Thus, we believe there is an opportunity for investors to gain exposure to the growing Australian and Japanese hospitality markets at the early stages of their upturn.


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

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


Valuation

  • After rolling forward our valuation to FY19, we have raised our DCF-based TP to S$0.91 from S$0.88.


Key Risks to Our View

  • Key risk to our positive view is if there are large falls in the AUD/JPY and there is excess supply in ASCHT’s respective markets, resulting in downside risks to our DPU estimates.



WHAT’S NEW - Solid 1H17 performance 


2Q18 DPU of 1.42 Scts 

  • Ascendas Hospitality Trust’s (ASCHT)'s 2Q18 DPU came in at 1.42 Scts (2.9% y-oy), taking 1H18 DPU to 2.73 Scts (2.2% y-o-y), which was below expectations as 1H18 DPU only represented only 47% of our original FY18 DPU forecasts. The weaker-than-expected result was largely due to softer performance from the Japanese operations as the JPY had weakened more than expected.
  • Nevertheless, ASCHT had a solid 2Q17 NPI, which rose 0.8% y-o-y as stronger contribution from China (+7.9%) and Australia (+2.2%) offset lower earnings from Japan (-7.4%).
  • The Chinese operations benefited from strong demand from members of China Lodging Group’s loyalty programme, which drove Ibis Beijing Sanyuan as well as healthy public demand. This resulted in flattish occupancy (91.1%) and a 4.9% y-o-y increase in average daily room rate (RMB427), which translated into a 4.6% y-o-y jump in revenue per available room (RevPAR) to RMB389.
  • Meanwhile, the Australian operations benefited from a stronger AUD, without which 2Q17 NPI in AUD terms would have fallen by 2.6% y-o-y. The decline was largely attributed to higher land taxes for ASCHT’s Melbourne hotel and higher operating expenses at its Brisbane Hotel. However, due to additional aircrew business at its Novotel Sydney property, RevPAR jumped 4.2% y-o-y to AUD148.
  • The Japanese properties had a weak quarter on the back of a 7% y-o-y fall in JPY despite NPI in JPY terms increasing by 2.3% y-o-y. The solid underlying performance was driven by higher RevPAR (1.6% yo-y) at the Oakwood properties and more inbound guest groups.
  • Finally, contribution from Singapore was flattish and predominantly based on fixed rental income given a soft Singapore hospitality market.

Stable gearing 

  • Ascendas Hospitality Trust’s (ASCHT)'s gearing was stable at 32.6% with the proportion of fixed-rate debt remaining high at 77.9%.
  • NAV per unit dipped to S$0.89 from S$0.92 at the end of 4Q17 due to the larger number of units on issue.

Still positive outlook ahead despite expected breather in FY18 

  • On the back of the weaker-than-expected 2Q18 results, we have lowered our FY18-19F DPU by 3% after incorporating a weaker JPY. While we expect FY18 DPU to take a short-term pause (falling 1% y-o-y) before recovering in FY19, we believe the medium-term outlook for ASCHT remains bright as the number of international visitors going to Australia and Japan – at 8m and 24m annually – remains low by international standards.
  • In addition, going into FY19, ASCHT should benefit from the Commonwealth Games in Brisbane which will be held in April 2018 as well as commencement of a new lease agreement from April 2018 at Hotel Sunroute Ariake, which will involve the rebranding of Oakwood service apartments under the Sunroute brand and the entire property being managed as a Sunroute hotel.
  • Furthermore, with gearing at only c.33%, ASCHT is well-placed to pursue acquisitions going forward including its forward agreement to purchase Aurora Melbourne in 2019.


Maintain BUY, revised TP of S$0.91 

  • We are maintaining our BUY call with a revised TP of S$0.91 as we roll forward our valuation to FY18.
  • We continue to like ASCHT for its attractive 6.6% yield as well as its exposure to the secular growth in the Australian and Japanese hospitality markets.




Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-12-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.91 Up 0.880



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