Acquisitions offset weak organic growth in Ascott REIT but is the selling overdone?

Acquisitions offset weak organic growth in Ascott REIT but is the selling overdone?

PC Lee
25/07/18, 12:22 pm

SINGAPORE (July 25): Ascott Residence Trust reported 2Q18 DPU of 1.84 cents. Adjusting for the realised forex gain of $11.9 million, 2Q18 DPU would have registered 13% y-o-y improvement, mainly due to four acquisitions in 2017: Ascott Orchard Singapore, two properties in Germany, and DoubleTree by Hilton Hotel New York.

Gross profits from master leases grew 28% y-o-y, mainly due to inorganic contribution from Ascott Orchard Singapore acquired in Oct 2017. The acquisition nearly trebled 2Q18 gross profit in Singapore to $4.6 million. Excluding the effect of acquisition, same-store gross profit in Singapore would have rose 13% y-o-y.

In a Tuesday report, DBS Group Research is maintaining a “buy” call on ART with a revised target price of $1.25.

DBS believes the recent 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.

In addition, DBS also believes the expected multi-year recovery of Singapore's hospitality market from 2018, should boost sentiment in the sector and lift all boats including ART.

Although consensus has a “hold” call with the most target prices below ART’s book value, given itss disappointing DPU performance over the past few years, DBS believes ART’s DPU should be on a recovery path soon.

“More importantly, we believe the critical factor that would drive ART’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,” says lead analyst Mervin Song.

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 $1.25 in Song’s view.

In contrast, CGS-CIMB Securities is keeping its “hold” call and DDM-based target price of $1.16 given the limited rerating catalysts.

The acquisition of Ascott Orchard Singapore in Oct 2017 boosted 2Q18 gross profit in Singapore by 188% y-o-y to $4.6 million. Excluding the effect of acquisition, same-store gross profit in Singapore would have been 13% y-o-y.

Gross profit from management contracts with minimum guaranteed income rose 6% y-o-y while those that of other management contracts declined 7% y-o-y due to weaker forex vs. S$, competition and ongoing refurbishments.

In local currency terms, despite the stronger revenue, CGS-CIMB says gross profits from China declined 5% y-o-y due to property tax refund received and reversal of prior year’s depreciation expense in 2Q17.

Regionally, Indonesia revenue was down 3% y-o-y due to ongoing renovation of Somerset Grand Citra. Japan revenue was softer due to keen competition in Kyoto. Philippines revenue was affected by Ascott Makati's renovation. And Vietnam revenue was impacted by fewer project groups in Hanoi.

Nevertheless, the trust is doing more marketing to target the leisure segment in Vietnam for diversification as 90% of its customers there are corporates.

Its sponsor is also revamping its IT system, particularly the areas of reservation, membership loyalty and business intelligence.

ART also emphasises the importance of constant refurbishment as yield usually improves within six months post renovation.

As at 12.14pm, units in ART are up 1 cent at $1.14.



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