Ascott Residence Trust - DBS Research 2018-01-29: Growth To Return

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ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Growth To Return

• Ascott Residence Trust's 4Q17 DPU of 2.04 Scts (+4% y-o-y) slightly above expectations due to payment of capital gains.
• Results boosted by recent acquisitions.
• Recovery in DPU from 2018 as ART benefits from the full year contribution of acquisitions made in 2017.

Uplift from rising tide. 

• We maintain our BUY call on Ascott Residence Trust (ART) with a revised Target Price of S$1.34. 
• 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 over 10%, we believe the rally still has legs.
• With the Singapore hospitality market expected to stage a multi-year recovery from 2018, based on historical correlations, the positive sentiment on the sector should lift all boats including ART.

Where we differ –

Ability to crystallise book value. 

• Consensus has a HOLD call with an average Target Price below ART’s book value, given concerns over the decline in FY17 DPU. However, in our view, this has already been well flagged in the past. 
• We believe the more critical factor that would 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 raising to drive growth, warrants ART to trade above its book value as implied in our Target Price of S$1.34 in our view.

Resumption of DPU growth. 

• Beyond 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 a further re-rating. 
• We have forecast two-year DPU CAGR of 2% over 2017-2019.

Valuation

• To account for re-rating of other hospitality REITs and more buoyant market conditions, we raised our DCF-based Target Price to S$1.34 from S$1.28 after lowering our beta to 0.95 from 1.

Key Risks to Our View

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

WHAT’S NEW -  Solid end to the year

4Q17 DPU above expectations

• 4Q17 DPU rose 4% y-o-y (after adjusting 4Q16 for the impact of the rights issue) to 2.04 Scts. This is ahead of expectations, largely due to distribution gains of c.S$6.5m related to the sale of Citadines Biyun Shanghai and Citadines Gaoxin Xian. Excluding the capital distributions, 4Q17 DPU would have fallen 11% y-o-y, primarily a result of the additional shares on issue from the rights issue conducted in April 2017, loss of income from the sale of Citadines Biyun Shanghai and Citadines Gaoxin Xian.
• Meanwhile, 4Q17 revenue and NPI rose 4% y-o-y as ART benefited from the acquisition of Citadines City Centre Frankfurt, Citadines Michel Hamburg and DoubleTree by Hilton Hotel New York, and Ascott Orchard Singapore.

Acquisitions boosted earnings from Germany, the US and Singapore

• Due to the acquisitions of Citadines City Centre Frankfurt, Citadines Michel Hamburg and DoubleTree by Hilton Hotel New York and Ascott Orchard Singapore over the past year, earnings from Germany, the US and Singapore rose 59%, 14% and 77% respectively.
• Beyond the boost from Ascott Orchard Singapore, the Singapore operations also benefited from stronger corporate demand which resulted in 4Q17 revenue per available unit (RevPAU) rising 6% y-o-y.
• Meanwhile, the US operations in Manhattan continues to face competition from new room supply, which translated to a 5% y-o-y decline in RevPAU. Underlying German operations were stable.

Mixed performance from other markets

• The performance of ART’s other markets was mixed. On the positive side, Belgium was the highlight with gross profit in SGD terms jumping 133% y-o-y as the market in Belgium recovered from the tourist attacks in 2016 and RevPAU jumping 22% y-o-y.
• The Philippines also had a strong quarter with gross profit up 29% as the operations there benefited from the refurbished Somerset Millennium Makati.
• However, weakness was seen in China whose earnings fell 9% y-o-y on the back of higher staff costs and absence of one-off writeback of property tax in 4Q16. This was despite RevPAU rising 6% y-o-y due to the impact of the refurbished Somerset Xu Hui Shanghai and stabilisation in ART’s properties in Tier 2 cities.
• The Japan operations were also soft with earnings down 30% on the back of a weaker JPY and impact of increased competition from new supply and minapku (private lodging) which resulted in 4Q17 RevPAU dropping 6% y-o-y. Earnings from Japan was also impacted by higher operating expenses.
• ART’s other key market, the UK, had a positive quarter, with earnings up 2% y-o-y on the back of underlying strong GBP versus SGD. Earnings in GBP terms was flat y-o-y despite RevPAU up 2% y-o-y as the UK operations were impacted by higher property taxes and marketing expenses.

Increase in gearing as expected

• Gearing rose to 36.2% from 31.9% at end the of September 2017, as ART completed the acquisition of Ascott Orchard Singapore. Post balance sheet date, gearing should drop to 34-35% upon the completion of divestments of Citadines Biyun Shanghai and Citadines Gaoxin Xian.
• Average cost of debt was stable at 2.4% with the proportion of fixed-rate debt dipping slightly to 81% from 87%.
• On the back of higher revaluation in Vietnam, Germany and the UK, offset by lower valuation in Australia and France and an increase in the number of shares on issue, NAV per unit rose marginally to S$1.25 from S$1.24 from end 3Q17. Excluding distributions, adjusted NAV per unit came in at S$1.21.

DPU recovery from 2018 onwards

• After rebasing its DPU 2017 following the rights issue to fund the acquisition of Ascott Orchard Singapore, we project ART to return to the growth path with a 3- year DPU CAGR of 2% from 2018 onwards.
• Underpinning the growth in DPU is the full year contribution from the acquisitions made over the past year and recovery in the Singapore hospitality market. However, the improvement should be partially offset by weakness from the Japanese and US operations which face a greater amount of competition from increase hotel room supply.

Maintain BUY with Target Price of S$1.34

• With 4Q17 results ahead of expectations, we maintain our BUY call with a revised Target Price of S$1.34. We raised our DCF-based Target Price to S$1.34 from S$1.28 after lowering our beta assumption to 0.95 from 1.0 to account for the re-rating of other hospitality REITs and more buoyant market conditions.
• Continue to like ART for its expected recovery in DPU and prospects for ART to trade above book as it reconstitutes and recycles its portfolio.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-01-29

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.34 Up 1.280