Ascott Residence Trust - OCBC Investment 2018-07-25: Sorry, I’m Checking Out For Now

Ascott Residence Trust - OCBC Investment Research 2018-07-25: Sorry, I’m Checking Out For Now ASCOTT RESIDENCE TRUST SGX:A68U

Ascott Residence Trust - Sorry, I’m Checking Out For Now

  • Enviable portfolio of assets…
  • But valuations are unattractive.
  • And lacking strong catalysts.

Results within expectations with 2Q DPU flat

  • Ascott Residence Trust’s 2Q18 revenue increased 6% y-o-y to S$130.5m, while DPU was flat at 1.84 S cents or 27% of our initial full-year forecast.
  • 1H18 DPU came up to 47% of our full-year forecasts which we consider within expectations. The group’s 2Q portfolio RevPAU was up 6% y-o-y at S$155, boosted by results from Belgium, China and the UK. 
  • Notably, the group’s UK assets succeeded in outperforming its peers, clocking an 8% y-o-y growth in RevPAU as well as a 5% y-o-y increase in gross profit despite stiffened competition and ongoing cost price pressures. 
  • In other highlights, we note that six of the master leases in France are up for renewal in Sept but as of now, we do not expect any major change to the terms.

SG: Corporate demand on the up!

  • Recall that ART’s SG assets clocked a 7% RevPAU decline in 1Q18. RevPAU has since stabilized, posting flat growth this quarter against 2Q17 numbers. Management noted stronger demand from Oil & Gas and Pharma project groups as well as flow-through from the healthy leisure arrivals for its SG-based serviced residences. 
  • Ascott Orchard Singapore (AOS) is unlikely to contribute more than its minimum income this year, but we see a higher likelihood in 2019 given AOS’s continued RevPAU growth.

Enviable portfolio, but unit price looks expensive to us

  • Ascott Residence Trust (ART) remains the largest hospitality S-REIT by market capitalization, with a diversified base of quality assets in gateway cities. 
  • Operationally, we like ART for the strong brand recognition of its assets as well as the resilient nature of its portfolio. In addition, gearing stands at a reasonable rate of 35.7% as at 30 Jun 2018, with ~84% of ART’s total borrowings on fixed interest rates. 
  • However, we remain cautious in light of the rising interest rate environment, given that investors may demand higher yield from bond-like assets. We also see muted DPU growth ahead – in the low single-digits for FY19. 
  • Our cost of equity increases from 7.3% to 8.0%, following which our fair value drops from S$1.14 to S$1.00. Against 24 Jul’s close, ART is trading at 6.0% FY18F yield, around 1 std deviation below its 5Y average. Against our fair value, ART would be trading at a FY18F DPU yield of 6.8% or close to its 5Y average. 
  • We downgrade ART from Hold to SELL as at 24 Jul’s close.

Deborah Ong OCBC Investment Research | 2018-07-25
SGX Stock Analyst Report SELL Downgrade HOLD 1.00 Down 1.140