SINGAPORE (Jan 29): DBS Research Group is maintaining its "buy" call on Ascott Residence Trust (ART) with a revised target price of $1.34.
After the completion of the recent rights issue to fund the acquisition of Ascott Orchard Singapore, ART's unit price has since rallied by over 10% but DBS believes the rally still has legs.
"With the Singapore hospitality market expected to stage a multi-year recovery from 2018, based on historical correlations, the positive sentiment on the sector should lift all boats including ART," says analyst Mervin Song.
Although consensus has a "hold" call with an average target price below ART’s book value given worries over the decline in FY17 DPU, DBS says they are missing the point.
"We believe the more 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 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 its target price of $1.34, says DBS.
Beyond crystallising its book value, DBS expects the resumption of DPU growth from FY18 onwards as ART benefits from the full-year contribution of its recent acquisitions should prompt a further re-rating.
"We have forecast two-year DPU CAGR of 2% over 2017-2019," says Song.
OCBC, which has a "hold" call, admits it likes ART's portfolio of assets in prime locations, geographical diversification and active portfolio rebalancing.
In addition, the research house finds ART’s strong sponsor support lends credibility to the long-term portfolio quality of the REIT.
"The extensive pipeline of sponsor assets such as the newly launched “lyf” brand – co-working serviced residences for millennials – will continue to offer ART opportunities to stay a step ahead of the other hospitality asset owners," says analyst Deborah Ong in a Monday report.
After rolling its estimates forward and other adjustments, OCBC's fair value increases from $1.11 to $1.16.
Units in ART are trading at $1.26 or 5.8% distribution yield for FY19 according to DBS.
