Ascott Residence Trust - CGS-CIMB Research 2020-07-28: Gradual Recovery Ahead

ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust - Gradual Recovery Ahead

Ascott Residence Trust's 1HFY20 DPU of 1.05 Scts (-69% y-o-y) was in line at 45% of our FY20F.
1H20 RevPAU down 52% y-o-y. Overall impact partially mitigated by merger.
Reiterate ADD as we believe the worst could be over, while the market has priced in the COVID-19 impact.

Ascott Residence Trust (SGX:HMN)’S 1HFY20 DPU of 1.05 Scts (-69% y-o-y) was in line with our expectations at 45% of our FY20F forecast. 1HFY20 revenue and gross profit declined by 16% and 28% y-o-y respectively, as RevPAU declined 52% y-o-y to S$70 while 21 properties were temporarily closed due to COVID-19. 1H20 portfolio occupancy declined 30% pts y-o-y to c.50%.
Ascott Residence Trust retained S$5m income in 1HFY20 for potential further rent deferment/waivers. However, it also topped up S$5m in income to mitigate the impact of COVID-19 on distributions and to share past divestment gains with shareholders.

Gross profit from master leases (59% of 1HFY20 total gross profit) increased 51% y-o-y in 1H20 due to the merger with Ascendas Hospitality Trust properties which was completed in Dec 2019. This was offset by lower management contract income due to the generally weak demand. In addition, contributions from management contracts with minimum guaranteed income also declined across UK, Belgium and Spain.
The operating environment remained challenging in Australia, France, Japan, UK and USA. China was more resilient from long stays and pick-up in domestic travel, the impact in Singapore was mitigated by alternative sources of business, while occupancy in Vietnam was supported by long-stay corporate guests.
Four master leases and three management contracts with minimum guaranteed income leases in France and UK were extended on variable terms for one year, effective 25 Mar/May 2020.

Barring the occurrence of a COVID-19 second wave, we believe 2Q was the worst quarter for Ascott Residence Trust this year.
We expect domestic demand and alternative business to support Ascott Residence Trust’s income in the near term as countries open borders gradually. Management sees better q-o-q performance in 2H20 and believes it would take a year for a full recovery. Additional 12 properties have been reopened in Jul and 7 are scheduled to reopen in 3Q20.

We increase our Ascott Residence Trust's FY20-22F DPU by 4-5% as we realign our numbers with its 1HFY20 results (first merged results after merger) and better-than-expected RevPAU performance.
We reiterate ADD at a higher DDM-based Target Price of S$1.08 as we believe the market has priced in the impact of COVID-19. The stock is trading at 0.74x P/BV.
See Ascott Residence Trust Share Price; Ascott Residence Trust Target Price; Ascott Residence Trust Analyst Reports; Ascott Residence Trust Dividend History; Ascott Residence Trust Announcements; Ascott Residence Trust Latest News.
Upside risks include capital distribution/accretive acquisitions/earlier opening of borders.
Downside risks include a COVID-19 second wave.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-28

SGX Stock Analyst Report ADD MAINTAIN ADD 1.08 UP 1.060