Is Ascott Residence Trust's Raffles Place divestment a bane or a boon?

Is Ascott Residence Trust's Raffles Place divestment a bane or a boon?

By: 
Michelle Zhu
10/01/19, 10:36 am

SINGAPORE (Jan 10): OCBC Investment Research is upgrading its call on Ascott Residence Trust (Ascott REIT) to “buy” from “hold” upon raising its fair value estimate for the REIT to $1.18.

The move comes after adjusting for its divestment of Ascott Raffles Place Singapore at 2 Finlayson Green for $353.3 million – representing a 64.3% premium to the property’s valuation of $215 million as at end-2018.

In a Thursday report, OCBC analyst Deborah Ong says she continues to like Ascott REIT’s portfolio of assets due to its strong brand recognition as well as high geographical diversification.

She also notes that the deal would have boosted the trust’s FY17 net asset value (NAV) per share by a 4.8% to $1.31 pro-forma, as compared to the actual NAV per share of $1.25.

Although Ong expects gearing to fall to about 32% from 36.4% as at end-Sept 2018 as a result of the divestment, she assumes the trust will make additional capital distributions out from its net gains from now till end-FY19 to smoothen out the loss in distributable income from the divestment.

“While we were not surprised by the Ascott Raffles Place divestment per se given Ascott REIT’s active asset recycling strategy, we were impressed that Ascott REIT has managed to sell such a substantial asset significantly above its book value,” comments the analyst. 

On the contrary, CGS-CIMB is opting to maintain its “hold” call on the trust with an unchanged price target of $1.13, and instead lowers its FY19-20 DPU forecasts by about 1% to reflect the loss of income from its disposal of Ascott Raffles Place, partially offset by interest savings.

Its analyst Eing Kar Mei also sees limited re-rating catalysts for the trust unless it makes further acquisitions of accretive assets.

Nonetheless, Eing highlights that the potential of additional headroom could provide Ascott REIT an opportunity to further optimise unitholders’ returns.

“Assuming the REIT uses the sales proceeds [from its divestment of Ascott Raffles Place] to reduce its borrowings, its gearing level is expected to fall from 36.4% in 3QFY18 to 31%. With the additional debt headroom, it could explore new acquisition targets or develop its own properties such as lyf one-north Singapore,” says Eing in a report on Wednesday.

“Our DDM-based target price remains unchanged given the minimal impact to the bottomline… Upside risks include acquisition of accretive assets while downside risks include slower-than-expected RevPAU performance,” she adds.

As at 11.19am, units in Ascott REIT are trading 2 cents higher at $1.12, which is at a 6.21 dividend yield for FY18F based on OCBC’s estimates.

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