Ascendas Hospitality Trust - DBS Research 2018-02-05: Still Offers Upside

Ascendas Hospitality Trust - DBS Vickers 2018-02-05: Still Offers Upside ASCENDAS HOSPITALITY TRUST Q1P.SI

Ascendas Hospitality Trust - Still Offers Upside

  • Ascendas Hospitality Trust (ASCHT)'s 3QFY18 DPU of 1.41 Scts (-14% y-o-y) below expectations.
  • Decline in DPU was expected due to absence of one-off gains in 3Q17 but Australian contribution lower than projected.
  • NAV per unit to rise to c.S$1.02 post the sale of the Beijing hotels at more than twice book value.

Tighter yields ahead. 

  • We maintain our BUY call with a revised Target Price of S$0.97. 
  • While we expect Ascendas Hospitality Trust’s (ASCHT) DPU to take a breather in FY18 and its yield differential to other hospitality REITs has now compressed to its average differential spread of 0.6% as we had projected in 2017, we believe the sale of its Beijing hotels at more than twice the book value demonstrates the valuation upside potential of its portfolio. This we believe should allow ASCHT’s yield differential to tighten further from here.

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

  • ASCHT’s 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.52% of 9M18 NPI) and Japan (c.25%) are in a secular uptrend over the medium term, thanks to their 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.

Upside from acquisitions. 

  • With its gearing expected to drop to c.28% post the sale of its Beijing hotels, ASCHT is in a strong position to pursue DPU accretive acquisitions. 
  • We also believe the trust’s ability to execute on non-organic opportunities is enhanced by having Mr Miguel Ko as Chairman. Mr Ko, who is 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.


  • After lowering our beta assumptions to better reflect the upside potential of its property values, we raised our DCF-based Target Price to S$0.97 from S$0.91.

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 - Soft quarter

3QFY18 DPU down 14% y-o-y

  • ASCHT’s 3Q18 DPU came in at 1.41 Scts down 14% y-o-y. While we had expected a drop largely on account of the absence of one-off income (realised FX gains in 3Q17), the results were weaker than expected due to softer performance from ASCHT’s Melbourne properties due to a lower amount of conference activities following the reopening of the convention centre in Sydney.
  • The decline in DPU was also a function of lower revenue (-1.8% y-o-y) and NPI (-4.7% y-o-y) as ASCHT suffered from a weaker AUD, RMB and JPY as well as higher amount of income that was retained (c.7% versus c.5% previously).

Lower contribution from Australia and Japan with stable performance from China

  • Over the quarter, the Australian property recorded a 1.9% improvement in revenue per available room (RevPAR) to A$160. The increase in RevPAR was mainly boosted by an increase at the Novotel Sydney Central (+7.9% y-o-y) and Courtyard by Marriott Sydney-North Ryde (+6.1% y-o-y) which benefited from recent room refurbishments. However, due to the lower contribution from its Melbourne property which was impacted by higher land tax and weaker conference activities, NPI in AUD and SGD terms fell 6.4% and 7.6% y-o-y respectively.
  • Contribution from ASCHT’s Japan portfolio was also down 5.4% y-o-y in SGD terms. This was largely due to a weaker JPY with underlying NPI in JPY terms up 2.1% y-o-y. The improvement in JPY terms was attributed to RevPAR at Oakwood Apartments Ariake Tokyo rising 5.9% y-o-y, with growth in inbound guests driving earnings from Hotel Sunroute Osaka Namba higher.
  • Meanwhile, earnings from the Beijing hotels were marginally up 0.7% due to a weaker RMB. NPI in RMB terms was up 1.4% y-o-y as the Novotel Beijing Sanyuan saw stronger public and corporate demand. This contributed to the China RevPAR being up 0.9% y-o-y to RMB349.
  • Finally, the Singapore operations recorded a 6.3% y- o-y increase in NPI largely due to some variable income received as RevPAR for the property improved.

Gearing to drop

  • On the back of currency fluctuations, ASCHT’s gearing rose to 33.2% from 32.6% at end 2Q18. This is expected to fall to 21-22% once ASCHT completes the sale of its Beijing hotels at end May 2018.
  • Over the quarter, ASCHT’s average borrowing costs fell to 2.7% from 2.9% as it achieved some savings following the refinancing of some its debt.
  • The proportion of fixed rate debt was relatively stable at c.77% with NAV per unit falling to S$0.86 from S$0.89 at end 2Q18 largely due to a higher number of shares on issue.

Trimming DPU estimates

  • On the back of a weaker than expected 3Q18 DPU, we trimmed our FY18-19F DPU by 2% p.a. However, we raised our DCF-based TP to S$0.97 from S$0.91 as we lowered our beta assumptions to capture the expected increase in NAV per unit as ASCHT is expected to complete the sale of its Beijing hotels for more than double its book value and on a 3.3% exit NPI yield. For more details, please refer to our recent report “Ascendas Hospitality Trust - Disposal of China hotels at double its book value”. 
  • ASCHT’s NAV per unit is projected to rise to S$1.02 from S$0.86 currently. We have pegged our Target Price slightly below ASCHT’s pro-forma NAV per unit of S$1.02 to account for ASCHT’s lower than average trading liquidity and uncertainty over where the trust will deploy its proceeds.

Near term headwinds but recovery on the horizon

  • While we expect ASCHT to continue to face some near-term headwinds from a weaker JPY and AUD relative to the levels a year ago and some softness at its Melbourne property from a reduction in conference activities, we expect a recovery going into FY19 as the Singapore hospitality market recovers and ASCHT benefits from its Ariake property being converted to a Sunroute brand versus a mix of Sunroute and Oakwood Apartments.
  • Beyond this, we also expect ASCHT to lift its earnings as it pursues acquisitions given its gearing will fall to 21-22% once it completes the sale of its Beijing hotels.

Maintain BUY with revised TP of S$0.97

  • We continue to like ASCHT for its medium-term leverage to the Australian and Japanese hospitality markets and c.13% discount to its proforma book value of S$1.02.
  • Therefore, with more than 10% total return projected over the coming 12 months, we maintain our BUY call with a revised Target Price of S$0.97.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-02-05
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.97 Up 0.91