Ascendas Hospitality Trust (ASCHT) - DBS Research 2018-06-25: Upside From Asset Recycling

Ascendas Hospitality Trust (ASCHT) - DBS Vickers 2018-06-25: Upside From Asset Recycling ASCENDAS HOSPITALITY TRUST SGX: Q1P

Ascendas Hospitality Trust (ASCHT) - Upside From Asset Recycling

  • Underlying 4Q18 DPU in line with expectations.
  • Recycles proceeds from Beijing hotel sale into Seoul property and three Osaka hotels.
  • 1-3% accretion to FY19-21F DPU post asset reconstitution strategy.



Buy low, sell high.

  • We maintain our BUY call with a revised Target Price of S$0.98. 
  • Ascendas Hospitality Trust’s (ASCHT) management has demonstrated the ability to buy low and sell high as seen by the sale of its Beijing hotels at more than twice the book value, exit yield of 3.6% and redeploying the proceeds into properties with net property income (NPI) yield above 4.1%.
  • However, this value add has not been recognised with ASCHT’s share price falling by over 10% YTD, which in our view offers an opportunity for investors given ASCHT’s high 7.6% yield and that it is trading at c.0.85x P/Bk.


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.50% of FY18 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 settle around 29-30% post the reconstitution of its portfolio, ASCHT is in a strong position to pursue DPU accretive acquisitions.
  • We also believe ASCHT’s ability to execute on non-organic strategy is enhanced by having Mr Miguel Ko as Chairman. He is the CEO of ASCHT’s sponsor and was formerly the Chairman and President of Starwood Hotels & Resorts (Asia Pacific Division) and Deputy Chairman and CEO of CDL Hotels International.


Valuation:

  • After incorporating the latest acquisitions and asset sale, we raised our DCF-based Target Price to S$0.98 from S$0.97.


Key Risks to Our View:

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



WHAT’S NEW - Modest end to FY18 but positioning for stronger FY19


4Q18 underlying DPU in line

  • ASCHT delivered 4Q18 DPU of 1.72 Scts (+26% y-o-y) taking FY18 DPU to 5.86 Scts (+3% y-o-y) which was above our 5.49 Scts estimate. This was largely due to the unexpected pay out of S$4.1m worth of look fee received in connection with the sale of ASCHT’s Beijing Hotels.
  • Excluding this one-off income, ASCHT’s underlying 4Q18 DPU of c.1.36 Scts (-1% y-o-y) was in line with expectations.

Stronger China contribution offset by softer Japan and Australia

  • The modest end to the year was mainly attributed to weakness from Australia and Japan.
  • The Australian operations were impacted by the depreciation of the AUD as well as oversupply in Brisbane and lower conference activities in Melbourne due to the reopening of the Sydney convention centre. This resulted in 4Q18 revenue per available room (RevPAR) falling 3% y-o-y to AUD154 and NPI in SGD and AUD terms falling 11% and 8% y-o-y respectively.
  • Meanwhile, contribution from Japan was impacted by ongoing renovations of rooms at Hotel Sunroute Ariake. This resulted in 4Q18 NPI in JPY falling 8% y-o- y with NPI in SGD terms dropping by 10% y-o-y due to the depreciation of JPY. Nevertheless, the property should benefit in FY19 as the entire hotel is operated under the Sunroute brand rather than a mix of Sunroute and Oakwood serviced apartments.
  • The drag from Australia and Japan was partially offset by an improved performance from the China portfolio. On the back of healthy public and corporate demand as well as limited new supply in the city centre, 4Q18 RevPAR rose 12.5% y-o-y, translating to 5.5% or 6.2% increase in 4Q18 NPI in RMB and SGD terms respectively.


Marginal increase in portfolio values

  • ASCHT reported a 0.6% increase in its overall property value. However, the changes in values were wide, ranging from a 20% decline to 9% increase.
  • On the negative side, Novotel Sydney Parramatta, Pullman and Mercure Melbourne Albert Park and Pullman and Mercure Brisbane King George Square reported a 5%, 6% and 9% fall in valuation respectively owing largely to weaker hotel performance. However, this was offset by 2-9% and 3-4% increase for ASCHT’s other Sydney and Japan properties on better earnings.
  • Property valuation for the Beijing and Singapore hotels were stable.
  • Post the annual asset revaluation exercise, NAV per unit now stands at S$0.92.


Deepens presence in Osaka

  • ASCHT also announced that it has agreed to acquire a portfolio of 3 freehold hotels in Osaka, Japan for JPY10,290m (S$126.1m) which is at a 2.9% discount to the latest valuation of JPY10,600m. The acquisition further deepens ASCHT’s presence in Osaka where it currently owns Sunroute Osaka Namba.
  • Two of the hotels - Hotel WBF Kitasemba West and Hotel WBF Kitasemba East - are expected to be acquired by September 2018, while the purchase of Hotel WBF Honmachi is expected to be completed by January 2019. The acquisitions are expected to be fully funded with debt.
  • The acquisition price of JPY20m per key also appears low relative to recent hotel transactions of between JPY25-40m per key.
  • Following the purchase of the three hotels, ASCHT will enter into fixed term building lease agreement or effectively a master lease for each of the hotels for 20 years.
  • This is its second acquisition in 2018, following the purchase of a hotel in Seoul, Korea for KRW72.1bn (S$89m) on a proforma NPI yield of 4.1%. For more details, see our report entitled “Anasayo (Hello) Seoul”.
  • The two acquisitions are effectively the recycling of proceeds from the sale of ASCHT’s Beijing Hotel for S$235.9m or 3.6% yield based on FY18 NPI.


Japan portfolio overview

  • The 3-star rated freehold hotels include:
    1. 13 floor Hotel WBF Kitasemba West with 168 rooms which was completed in March 2018 and commenced operations in May 2018,
    2. 168 rooms Hotel WBF Kitasemba East which was completed in April 2018 and opened in June 2018 and;
    3. Hotel WBF Honmanchi, a 15 floor hotel offering 182 rooms which was completed in April 2018 and commenced operations in June 2018.
  • Given that the three properties were only recently completed, we expect minimal capital expenditure over the next few years.
  • Centrally located in Osaka, the hotels are in close proximity to key tourist attractions such as Osaka Castle and Dontonburi. The hotels are also well connected to other parts of Osaka via Honmachi Station which is a short walking distance away.
  • The hotels are managed by an entity of White Bear Family (WBF) which is part of a hospitality group established in 1977. The business includes travel agency, hotel management and car rental. WBF currently operates close to 30 hotels across five cities in Japan, with 11 of them in Osaka.
  • The acquisition is expected to be funded with local JPY debt.


% DPU accretion

  • After incorporating the Japanese and Korean acquisitions as well as the divestment of the Beijing hotels announced in January, we estimate a 1-3% accretion to our FY19-21F DPU and raise our DCF- based Target Price to S$0.98 from S$0.97.
  • Due to the good price from the sale of the Beijing hotels, we expect gearing to dip marginally to 29-30% from 30-31% level at end FY18. This puts ASCHT in a strong position to pursue further acquisitions, including the serviced apartments which ASCHT previously agreed to acquire in 2019 for AUD120m.


Asset reconstitution positive but unappreciated

  • We applaud ASCHT for its ability to sell high and buy low, exiting its Beijing hotels on an NPI yield of 3.6%, double that of the prior valuation on ASCHT’s books in RMB terms and recycling the proceeds into two properties above 4%.
  • While acknowledging the “tight” acquisition yields on face value, we believe this is reflective of property markets globally. In addition, despite limited earnings upside from the new Japanese portfolio, it adds a further layer on earnings stability, with the percentage of master lease properties increasing from 40% previously to 51%.
  • Overall, we believe the market has not fully appreciated ASCHT’s active management and value add through its asset reconstitution strategy. ASCHT’s share price has gone down over 10% since it announced the sale of its Beijing hotels.


Maintain BUY with revised Target Price of S$0.98

  • Given 28% upside to our revised Target Price of S$0.98, we maintain our BUY call.
  • We believe, with ASCHT trading at a steep discount of 15% to its book value and offering an attractive 7.6% yield, it deserves another look by investors, given the management’s proven ability of adding value through its recent asset recycling strategy.





Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | https://www.dbsvickers.com/ 2018-06-25
SGX Stock Analyst Report BUY Maintain BUY 0.98 Up 0.970



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