Ascott Residence Trust - CIMB Research 2018-04-18: 1Q18 Slight Miss; US Slips To Slight Losses

ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - 1Q18 Slight Miss; US Slips To Slight Losses

While 1Q is the seasonally weakest quarter, we consider Ascott Residence Trust's 1Q18 DPU of 1.35 Scts (+15% y-o-y), which formed 19% of our full-year forecast, to be a slight miss.
Adjusting for the realised FX gain of S$1.6m, 1Q18 DPU would have registered a 9% y-o-y improvement.
Results continued to be a mixed bag with particular organic weakness in Japan, the Philippines, Vietnam and the US. China achieved healthy operating performance.

Assuming 40% cap on gearing, we estimate Ascott Residence Trust has c.S$350m debt headroom for acquisitions. We note its more disciplined/prudent approach to acquisitions.
Given the lack of catalysts, we maintain our HOLD call with lower DDM-based Target Price.

We consider Ascott Residence Trust's 1Q18 DPU of 1.35 Scts (+15% y-o-y), which formed 19% of our full-year forecast, to be a slight miss.
Adjusting for the realised FX gain of S$1.6n, 1Q18 DPU would have registered a 9% y-o-y improvement. The increase was mainly due to the four acquisitions in 2017 (Ascott Orchard Singapore, two properties in Germany and DoubleTree by Hilton Hotel New York). This was partially offset by divestments (18 Japanese rental housing and two properties in China) and organic weakness.

Gross profits from master leases (40% of group’s gross profits) grew 32% y-o-y, mainly due to inorganic contribution from Ascott Orchard Singapore and the two acquisitions in Germany (Citadines City Centre Frankfurt and Citadines Michel Hamburg).
Management contracts with minimum guaranteed income (10% of group’s gross profits) inched up 4% y-o-y. Management contracts (50%) decreased 13% y-o-y due mainly to weaker Japan, the Philippines and Vietnam. The US slipped to slight losses (S$0.1m gross profits in 1Q17).

Gross profits from Japan fell 29% y-o-y due to the divestment of 18 rental housing properties and 7% drop in RevPAU (keen competition and new supply).
The Philippines slid 30% y-o-y due to ongoing renovation of Ascott Makati.
Vietnam decreased 9% y-o-y on weaker demand.
In the US, RevPAU (same-store) decreased 4% y-o-y due to ongoing renovation of Sheraton Tribeca and keen competition.
Otherwise, China improved 4% y-o-y, despite the divestments.
Singapore was soft with RevPAU falling 7% y-o-y.

Gearing at end-1Q18 was maintained at 36.1%. All-in borrowing costs improved slightly to 2.3% p.a. (FY17: 2.4%). c.10% of total borrowings will be refinanced in 2018.
We note that Ascott Residence Trust has net gain proceeds of S$56.1m from divestment of the two Chinese properties. S$6.5m had been distributed in 4Q17; the remaining could be used for AEI/acquisition.
Assuming 40% cap on gearing, we estimate that Ascott Residence Trust has c.S$350m available debt headroom. At this juncture, it is looking closer at Europe and Japan.

We reduce our FY18F-19F DPU by 3.6-5.2% to factor in the organic weakness. We also introduce our FY20F estimates. Our DDM-based Target Price accordingly drops to S$1.16.
We highlight that we have baked in S$150m of acquisitions at 5.5% entry NPI yield, which would contribute from FY19F onwards. That said, we note Ascott Residence Trust’s more disciplined and prudent approach towards acquisitions.
Our HOLD call is intact given limited catalysts.
Upside risks could come from pick up in core markets; downside from higher rate hikes.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-04-18

SGX Stock Analyst Report HOLD Maintain HOLD 1.16 Down 1.200