ASCOTT RESIDENCE TRUST
SGX:A68U
Ascott Residence Trust - Waiting To Be Rediscovered
- 2Q18 DPU of 1.84 Scts (flat y-o-y) below expectations.
- Results impacted by weaker-than-expected margins and FX headwinds.
- Working assets harder to driver future share price performance.
Oversold.
- We maintain our BUY call on Ascott Residence Trust (ART) with a revised Target Price of S$1.25.
- We believe the recent Ascott Residence Trust's share price correction has been overdone as investors have ignored the conservative valuation of ART’s portfolio, now pricing it at a discount to book. Beyond this, we also believe the expected multi-year recovery of Singapore's hospitality market from 2018, should boost sentiment in the sector, and based on historical correlations, should lift all boats including ART.
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 its disappointing DPU performance over the past few years. While acknowledging this concern, we believe DPU should be on a recovery path soon.
- 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 ART to trade above its book value as implied in our Target Price of S$1.25 in our view.
Recovery in DPU.
- Beyond crystallising its book value, we believe the resumption of DPU growth from FY19 onwards, delayed from our original assumption in FY18, as ART works its assets harder should prompt a further re-rating.
- We forecast a two-year DPU CAGR of 2% over 2018-2020.
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 single country contributing more than 20% of its net property income.
WHAT’S NEW - 2Q18 softer than expected
2Q18 DPU flat y-o-y
- Ascott Residence Trust's 2Q18 DPU was flat y-o-y coming in at 1.84 Scts but after adjusting for the rights issue and one-off FX gain last year, 2Q18 DPU would have been up 13% y-o-y. However, with 1H18 DPU at 3.19 Scts (-5% y-o-y) and representing c.45% of our FY18F DPU, the results were below expectations.
- While the first half is typically the seasonally weaker quarter, its usual contribution is c.47%. The weaker-than-expected performance was due to softer contribution from Australia (depreciation of AUD) as well as slower recovery in margins at the US, UK and Singapore operations.
Key markets generally flat or up
- Ascott Residence Trust’s key markets were generally flat or up with the exception of China and Vietnam.
- UK gross profit in GBP and SGD terms (10% of 2Q18 gross profit) rose 6% and 5% y-o-y respectively, mainly due to the impact of the refurbished apartments at Citadines Barbican London and uplift in leisure demand. This also resulted in a 6% y-o-y growth in revenue per available unit (RevPAU) in GBP terms.
- The Singapore operations (11% of 2Q18 gross profit) saw a 78% y-o-y increase in gross profit but this was mainly due to the acquisition of Ascott Orchard. However, NPI and RevPAU for the properties under management contract (Somerset Liang Court and Citadines Mount Sophia) were stable.
- Earnings from the Chinese portfolio (9% of 2Q18 gross profit) fell 11% but this was mainly due to the divestment of Citadines Biyun Shanghai and Citadines Gaoxin Xian in January 2018. Excluding these two properties, revenue and RevPAU on a same-store basis would have increased by 2% and 4% y-o-y respectively. However, NPI on a same-store basis fell 6% y-o-y in RMB terms due to one-off tax refund and lower depreciation in 2Q17.
- Gross profit for the Japan portfolio fell 4% y-o-y in SGD terms (13% of 2Q18 gross profit), mainly due to a weaker JPY and impact from the divestment of 18 rental housing properties in April 2017. On a same- store basis, RevPAU was down 1% due to increased competition and new supply in Kyoto. However, gross profit increased marginally (+1%) owing to lower operating and maintenance costs.
- Contribution in SGD terms from US properties (14% of 2Q18 gross profit) jumped 32% y-o-y due to the acquisition of DoubleTree by Hilton Hotel New York in August 2017. The results were also boosted by a 3% y-o-y improvement in RevPAU to US$243, due to stronger market demand. However, on a same-store basis, gross profit remained stable owing to higher staff costs and marketing expenses.
- Earnings in SGD terms for the Vietnam operations (8% of 2Q18 gross profit) disappointed, down 19% y-o-y. This was mainly attributed to fewer project groups in Hanoi which resulted in RevPAU falling 11% y-o-y to VND1,528.
Lower gearing
- On the back of higher valuation of properties in Vietnam, UK, France and Philippines due to higher earnings following various renovations, gearing fell to 35.7% from 36.1% in 1Q18.
- Borrowing cost was stable at 2.3% with the proportion of fixed rate debt at 84%.
- NAV per unit now stands at S$1.23 or excluding distributions at S$1.23.
Disappointing results but renewed focus on working assets harder should drive future earnings growth
- On the back of weaker-than-expected 2Q18 results, we cut our FY18-20F DPU by 5% after tweaking our margin assumptions lower and reducing our FX assumptions on the back of AUD depreciation. As a consequence of the lower earnings estimates, we also reduced our DCF-based Target Price to S$1.25 from S$1.30.
- While we are disappointed with lowering our earnings estimates again after doing so in 1Q18, we believe management’s increased focused on working its existing assets harder should eventually translate into a return of DPU next year, which should act as a catalyst for a share price re-rating.
- We also sense a de-emphasis by Ascott Residence Trust on acquisitions but rather on asset recycling to crystallise value. A successful execution on this strategy, should also restore investor confidence in the stock.
Maintain BUY, revised Target Price of S$1.25
- On account of weaker-than-expected 2Q18 results, we lowered our DCF-based Target Price to S$1.25 from S$1.30.
- With 10% capital upside and decent 5.9% yield, we maintain our BUY call.
Mervin SONG CFA
DBS Group Research Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2018-07-24
SGX Stock
Analyst Report
1.25
Down
1.300
