Ascott Residence Trust - DBS Research 2018-04-19: Hidden Gem

Ascott Residence Trust - DBS Vickers 2018-04-19: Hidden Gem ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Hidden Gem

  • Ascott Residence Trust's 1Q18 DPU of 1.35 Scts below expectations.
  • Weaker than expected performance from Singapore and the UK were the main drags.
  • Seasonal boost ahead with earnings kicking in from completion of various AEIs.



Oversold. 

  • We maintain our BUY call on Ascott Residence Trust (ART) with a revised Target Price of S$1.30. 
  • We believe Ascott Residence Trust's recent share price correction has been overdone as investors have ignored the conservative valuation of Ascott Residence Trust’s portfolio, now pricing it at a discount to book. Beyond this, we also believe the expected multi-year recovery of Singapore hospitality market from 2018, should boost sentiment in the sector, and based on historical correlations, should lift all boats including Ascott Residence Trust.


Where we differ – Ability to crystallise book value. 

  • Consensus has a HOLD call with the majority of Target Prices’ below Ascott Residence Trust’s book value, given disappointment over DPU performance over the past few years. While acknowledging this concern, we believe this is now in the past and DPU should be on a recovery path.
  • More importantly, we believe the critical factor that would drive Ascott Residence Trust’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 Ascott Residence Trust to trade above its book value as implied in our Target Price of S$1.31 in our view.


Recovery in DPU. 

  • Beyond crystallising its book value, we believe the resumption of DPU growth from FY18 onwards as Ascott Residence Trust benefits from the full-year contribution of its recent acquisitions should prompt a further re-rating. 
  • We forecast two-year DPU CAGR of 1-2% over 2017-2020.


Valuation

  • On account of a weaker than expected 1Q18 results, we lowered our DCF-based Target Price to S$1.30 from S$1.34.


Key Risks to Our View

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



WHAT’S NEW - Weaker than expected 1Q18 results 


Soft start to the year 

  • 1Q18 DPU came in at 1.35 Scts, down 11% y-o-y. 
  • Based on Ascott Residence Trust ’s adjustment for the rights issue last year, adjusted 1Q18 DPU would have risen 15% y-o-y. However, 1Q18 results were below expectations.
  • While 1Q is seasonally the weakest quarter, 1Q18 only represented 19% of our and consensus FY18F DPU. The underperformance appears to have been driven by weaker than expected performance from the UK and Singapore operations. 
  • Gross profit from the UK was flat y-o-y despite RevPAU increasing 7% y-o-y to GBP102 on the back of higher property taxes and marketing expenses. While Singapore’s total contribution rose on the back of the acquisition of Ascott Orchard Singapore, the Singapore operations was negatively impacted by 7% y-o-y fall in RevPAU to S$165 at Somerset Liang Court and Citadines Mount Sophia. These properties were hit by the Singapore government’s reduction in the minimum lease for condominiums from 6 months to 3 months.
  • Overall 1Q18 revenue and NPI rose 1% and 3% y-o-y, largely on the back of acquisitions made in Singapore, Frankfurt, Hamburg, New York but partially offset by divestment of two serviced residences in Shanghai and Xian.

Mixed performance in ART’s other key markets 

  • US operations had a weak start to the year with US$0.1m gross loss. Adjusting for straight-line recognition of operating lease expense, the US operations would have reported US$0.4m gross profit, although down from S$0.7m in the prior year. The decline y-o-y is mainly due to 9% y-o-y fall in RevPAU to US$147 from increased room supply. In 2018, 6,500 rooms are expected to be added in Manhattan.
  • Profitability in the Japanese operations was also down y-o-y mainly due to the divestment of 18 rental housing properties. Excluding this divestment, on a same store basis, gross profit in JPY terms would have been down 9% y-o-y as RevPAU fell 7% y-o-y on the back of price competition from new hotel supply.
  • The properties in China had a good quarter with gross profit up 13% y-o-y in RMB terms after excluding the two divested properties. This was underpinned by 4% y-o-y rise in RevPAU on a same store basis owing to improved performance at Ascott Guangzhou and Somerset Olympic Tower Tianjin and lower depreciation expense.
  • Earnings from the Australian properties was marginally down 1% y-o-y in SGD terms mainly due to a weaker AUD. However, underlying earnings in local currency terms was relatively stable owing to the master leased Quest properties and steady performance from Ascott Residence Trust’s Melbourne property.

Stable gearing with slight fall in borrowing costs 

  • As at end 31 March 2018, gearing stood at 36.1%, slightly down from 36.2% at end 31 December 2017. Borrowing costs was also lower at 2.3%, down from 2.4% at end 4Q17. 
  • Going forward, we understand that overall borrowing costs may dip further as Ascott Residence Trust refinances its upcoming debt maturities. NAV per unit (excluding distributable income to unitholders) was stable at S$1.21.

Tailwinds from upcoming AEIs and seasonal uplift 

  • Heading into 2H18, Ascott Residence Trust should benefit from the expected completion of several ongoing AEIs at Sheraton Tribeca New York Hotel, Ascott Makati (Phase II), and Somerset Grand Hanoi.
  • Historically, post similar refurbishments, Ascott Residence Trust has seen up to double digit improvement in ADR. Furthermore, as we progress through the year, Ascott Residence Trust’s earnings should benefit from a seasonal uplift.

Trimming DPU estimates 

  • On the back of a weaker than expected 1Q18, we moderated our assumptions for RevPAU for the Singapore operations and margins for the UK operations. This led us to lower FY18-20F DPU by 1- 2%.
  • On the back of lower earnings estimates, we also reduced our DCF-based Target Price to S$1.30 from S$1.34.


Maintain BUY with revised Target Price of S$1.30 

  • While 1Q18 results were below expectations, we maintain our BUY call with a revised Target Price of S$1.30.
  • We remain confident that as Ascott Residence Trust reconstitutes its portfolio, it will be able to demonstrate the conservative nature of its property valuations, which should result in Ascott Residence Trust trading at a premium to book. 
  • In addition, in our view as Ascott Residence Trust further “sweats” its properties translating to a recovery in DPU, this will reassure investors over the earning power of Ascott Residence Trust’s portfolio.





Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-04-19
SGX Stock Analyst Report BUY Maintain BUY 1.30 Down 1.340



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