Ascott Residence Trust - DBS Research 2020-12-01: Ahead Of The Pack


Ascott Residence Trust - Ahead Of The Pack

  • Pent-up travel demand, especially for leisure, to drive a “V-shaped” recovery for global travel.
  • Ascott Residence Trust’s global portfolio enables the REIT to capture demand within domestic and international travel, ahead of its peers.
  • Revision of estimates to align with sector estimated road to normalization of four years, which is conservative.
  • Target price of Ascott Residence Trust raised to S$1.20 on lower WACC assumptions.

Strong rebound in operating metrics projected.

  • While we believe that 2021 brings much promise for the hospitality sector, the growth trajectory will likely differ drastically between markets and hospitality asset types. Given that most governments will likely be more cautious and gradual in their plans to reopen their borders to international tourists post the mass distribution of a vaccine, before that happens, the focus will be on domestic travel markets. Therefore, markets like China, Japan, Europe, US and Australia, which have deeper domestic demand, will recover first.
  • Destinations with a focus on international travel, like Singapore, while starting to reopen their borders in 4Q20 to selected countries, will most likely see a more lagged pace of recovery.

Domestic markets to lead the rebound.

  • Ascott Residence Trust (SGX:HMN) is one of the more diversified S-REITs as shown in the table 3, amongst its peers for which we see many opportunities to tap on the gradual reopening of the global hospitality sector, with close to 72% of assets in these “domestic markets”, we anticipate ART to see positive results come early 1H21.
  • While the path back to pre-COVID levels may be a couple of years away, we are optimistic on this forward growth trajectory in distributions (or distributions per unit [DPU]) which should accelerate upon the mass distribution of a vaccine globally. We conservatively assume a 4-year trajectory back to normalcy in our estimates (though front-end-loaded growth) but acknowledge that this timing remains fluid for now and our estimates reflect these updated sector estimates and cut it by 12%-25% for FY21- 22.

Potential to exceed our forecasts.

  • In our scenario analysis of a 68%/89%/95%/100% catch-up for FY21/22/23/24 in RevPARs compared to pre-COVID levels in our models, Ascott Residence Trust should achieve 90% of its pre-COVID-19 DPU by FY22, driven by a mix of organic growth and acquisitions. In a more bullish scenario, Ascott Residence Trust may exceed its pre-COVID-19 DPU by FY23.

Compelling value.

  • We see compelling value in Ascott Residence Trust at 0.8x P/NAV, more than -1.5 SD of its historical 10-year mean, with an attractive 6.9% FY22 dividend yield with upside if travel rebound occurs faster than expected.
  • Our target price for Ascott Residence Trust is raised to S$1.20, offering total returns in excess of 21%. Our target price implies a target P/NAV multiple of 1.0x.

Distracted but not disrupted.

  • Focus on big domestic travel markets and long-stay segment should pay off. Phased reopening a positive sign that portfolio has attained at least a breakeven level of operations. With a diversified portfolio deriving c.70% exposure from these “domestic markets”, we believe Ascott Residence Trust can rebound ahead of peers.
  • Our earnings estimates are cut by 12%- 25% in reflection of our revised view of a 4-year normalization period for the sector.

Asset recycling to drive earnings and NAV upside.

  • Ascott Residence Trust's healthy 36% gearing level and S$2bn debt headroom could mean that acquisition of sponsor's > S$1.0bn US multi-family portfolio may be considered in 2021.


Where we differ:

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-12-01
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