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DBS lowers ARA US Hospitality Trust's TP to 75 US cents; expects more meaningful recovery in FY2022

Felicia Tan
Felicia Tan8/23/2021 06:33 PM GMT+08  • 2 min read
DBS lowers ARA US Hospitality Trust's TP to 75 US cents; expects more meaningful recovery in FY2022
The lower TP was due to a slight reduction in DBS's earnings estimates.
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DBS Group Research analyst Geraldine Wong has maintained “buy” on ARA US Hospitality Trust (ARAHT) as she deems the REIT’s recovery to be “on track”.

“We expect a sustained recovery for ARAHT on the back of a summer leisure demand spillover into 2HFY2021 and the return of corporate travel,” she writes in an Aug 20 report.

That said, Wong has reduced her target price estimate to 75 US cents ($1.02) from 79 US cents previously, as she reduces her earnings estimates slightly.

“We were too optimistic previously,” she explains.

The new target price implies a 48% upside and an “attractive” FY2022 yield of 9.5%.

Wong, however, remains optimistic on the REIT’s prospects as she still sees a doubling of cashflows in 2HFY2021 and a further recovery in FY2022.

“We [still] see scope for occupancy and rates to move further upwards towards normalised levels,” she says.

“Operational data sector-wide also seems to support this steady recovery to normalcy,” she adds.

To Wong, ARAHT is well-positioned in the select-service and extended-stay segments, which are favoured over the full-service segment, given the more labour-efficient operating model.

“We thus see profits and distributions rebound quicker than the other segments on the back of a lower cost front and consumer preferences, benefitting ARAHT,” she writes.

On the back of a return in travel demand, an improvement in cashflows in the second-half of FY2021 will support higher portfolio valuations.

The catchup in valuations and lower gearing will be positive catalysts for the counter.

“Valuers have opined that the fair value for ARAHT portfolio should be US$888 million upon normalisation in 2024 (vs US$687 million as at end December 2020), bringing the gearing level down to 40% in the medium term,” says Wong.

Units in ARAHT closed flat at 49.5 US cents on Aug 23, with an FY2021 P/NAV of 0.8 times and distribution yield of 1.5%, according to DBS’s estimates.

Photo: Bloomberg

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