Ascott Residence Trust - Maybank Kim Eng 2019-07-04: An Expected Merger Exercise

ASCOTT RESIDENCE TRUST (SGX:A68U)

Ascott Residence Trust - An Expected Merger Exercise

ASCOTT RESIDENCE TRUST (SGX:A68U) has swiftly announced a merger with ASCENDAS HOSPITALITY TRUST (SGX:Q1P) in a widely anticipated exercise, following the completion of its sponsor’s acquisition of Ascenda-Singbridge last week. The increased AUM could support medium term DPU growth upside on synergies.
Near-term however, a key re-rating catalyst will need to be led by broader investor interest with the higher trading liquidity in its shares. We have kept DPUs intact pending deal closure. HOLD to our DDM-based SGD1.25 Target Price (COE: 7.6%, LTG: 2.0%).

Our top hospitality sector picks are CDL HOSPITALITY TRUSTS (SGX:J85) (BUY, Target Price SGD1.80) and FAR EAST HOSPITALITY TRUST (SGX:Q5T) (BUY, Target Price SGD0.80).

Ascott Residence Trust has announced a SGD1.2b merger with Ascendas Hospitality Trust via a trust scheme at a gross exchange ratio of 0.836x (based on Ascott Residence Trust’s FY18 and Ascendas Hospitality Trust’s FYMar19 NAVs), with 5% of the consideration funded by cash and the remaining 95% in Ascott Residence Trust units (at SGD1.30). The deal implies a 2.5% DPU accretion for Ascott Residence Trust.
The combined REIT aims for inclusion in the FTSE EPRA Nareit Developed Index, in line with the higher developed market EBITDA concentration (from 75% to 82%) and a 50% jump in free float from SGD1.6b to SGD2.4b - above the SGD1.7b index threshold.

Ascott Residence Trust’s AUM rises from SGD5.7b to SGD7.6b, while its debt headroom (on pro-forma leverage of 36.9%) rises from SGD0.8b to SGD1.0b, on the back of the 37.2% and 36.0% increases in revenue and gross profit. We see limited risk to the deal closure, as Ascendas Hospitality Trust’s units have suffered from low liquidity, and will likely gain from a larger sponsor.
Ascott Residence Trust will need to obtain various transaction-related approvals from its unitholders at its EGM in Oct 2019, with the deal expected to complete by end-2019.

We have kept forecasts unchanged for now – both DPU growth profile and visibility remain supported by a similar balance of stable and growth income. Revenue and cost synergies from its expanded AUM, driven by a rebranding of Ascendas Hospitality Trust’s properties with the expiry of its master leases, could support medium term DPU upside.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-07-04

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.250 SAME 1.250