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Analysts keep ‘buy’ on Ascott Residence Trust in light of strong RevPAU trajectory

Chloe Lim
Chloe Lim8/2/2022 10:54 AM GMT+08  • 4 min read
Analysts keep ‘buy’ on Ascott Residence Trust in light of strong RevPAU trajectory
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Analysts are positive on Ascott Residence Trust (ART) and foresee steady growth ahead for 2HFY2022 on the back of strong pent-up demand from both leisure and corporate travel.

OCBC Investment Research analyst Chu Peng has kept her “buy” rating on ART with a lowered fair value estimate to $1.29 from $1.30, the only one to do so among the three brokerages featured here.

“ART’s 1HFY2022 ended June distribution per unit (DPU) came in at 2.33 cents which was 13.7% y-o-y, in-line with our expectations,” says Chu.

During the period, ART’s portfolio revenue per available unit (RevPAU) also rose 91% y-o-y or 85% q-o-q to $124 in 2QFY2022, driven by both higher average daily rate and occupancy rate, reaching around 82% of pre-Covid-19 levels.

On a q-o-q basis, all markets but China registered positive RevPAU growth, led by the US, UK and Singapore.

At the same time, while its properties in France and the UK have outperformed pre-Covid-19 levels, management sees room for stronger RevPAU recoveries in Japan and China in 2HFY2022.

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Student accommodation and rental housing, occupying 20% of 1HFY2022 gross profit, remained resilient in 1HFY2022 with average occupancy rate above 95%.

“With a geographically diversified portfolio and range of lodging assets, ART could continue to benefit from a recovery in the hospitality sector while its stable income– 68% of 1HFY2022 gross profit– will offer income stability against any downside risks,” says Chu.

ART’s 1HFY2022 revenue and gross profit rose 44.5% y-o-y and 44.0% y-o-y to $267.4 million and $118.2 million respectively, supported by the recovery in hospitality sector and additional contributions from the acquisitions of 12 properties, partially offset by divestments of three assets. “Excluding the contributions from acquisitions and divestments, on a same store basis, 1HFY2022 revenue and gross profit would have grown 32% and 28% y-o-y,” the analyst writes.

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Maybank Securities analyst Chua Su Tye has also kept his “buy” rating on ART with an increased target price of $1.40 from $1.30.

Chua notes higher stable income contribution, where contribution from stable income sources rose to 68% of 1HFY2022 gross profit as compared to 64% in 2HFY2021) on the back of acquisitions.

Pre-leasing is strong at around 95% for the 2023 academic year, with rents set to rise at a faster up 8% y-o-y from +5% y-o-y in 1QFY2022. “The segment accounted for 17% of 1HFY2022's assets under management (AUM) from 16% in FY2021 as compared to its medium-term 25%-30% target, with this set to rise,” says Chua.

Gearing was stable at 37.5% as compared to 37.8% as at end-March, and fixed-rate debt remains high at 79%, while borrowing costs rose to 1.7% from 1.6%. “We expect a 50 basis points (bps) increase in its base rate could lower DPU by less than 2%,” says Chua.

“We see a $1.8 billion debt headroom at a 50% limit supporting acquisitions, with the new CEO looking to leverage on ART’s strong financial fundamentals to drive growth on its more resilient, long-stay AUM,” he adds.

In his report, Chua has also raised his forecasts by 7%-8% with a stronger RevPAU growth assumption.

Finally, UOB Kay Hian analyst Jonathan Koh has kept his "buy" rating on ART with a higher target price of $1.35 from $1.31 previously.

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Noting the sustained pent-up demand during the Covid-19 restrictions, the analyst sees ART as being able to generate profitable growth by raising room rates to cover rising utility and labour costs.

"[ART] will also benefit from full-year contributions from the acquisition of student accommodation undertaken last year," he writes.

In addition, the analyst says ART's recovery will be strengthened once Japan reopens its doors to leisure travellers. The country's portfolio accounts for 17.8% of ART's AUM.

Koh also likes ART's setting its sights on a higher goal and its pivot towards longer-stay properties.

ART's management indicated that it plans to raise the asset allocation target in longer-stay assets by 10 percentage points to 25%-30% in the medium term, notes Koh.

In addition to his higher target price, Koh has raised his DPU forecast for the FY2022 by 3.8% due to the rapid recovery in RevPAU and higher room rates.

"We factored in capital distribution from past divestment gains at $20 million in 2HFY2022, $10 million in 2HFY2023 and $10 million in 2HFY2024," he adds.

As at 10.39am, units in ART are trading at 1 cent down or 0.86% lower at $1.15.

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