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PhillipCapital upgrades CapitaLand Ascott Trust to 'buy' as it sees a rebound underway

Felicia Tan
Felicia Tan11/3/2022 04:59 PM GMT+08  • 4 min read
PhillipCapital upgrades CapitaLand Ascott Trust to 'buy' as it sees a rebound underway
CLAS's Citadines in London's Trafalgar Square. Photo: CLAS
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Analysts are positive on CapitaLand Ascott Trust’s (CLAS) prospects after the trust posted its business update for the 3QFY2022 ended Sept 30 on Oct 28.

While no financials were provided in the voluntary update, PhillipCapital analyst Darren Chan has upgraded his recommendation to “buy” as he sees the trust’s rebound as “underway”.

“CLAS remains our top pick in the REIT sector with its geographically diversified portfolio, range of lodging asset classes, stable income base which has proven its resilience through Covid-19, and a strong sponsor,” the analyst writes in his Nov 1 report.

In its business update, CLAS reported that its gross profit stood at around 90% of its Covid-19 levels. Its portfolio revenue per average unit (RevPAU) surged 88% y-o-y to $132 due to higher an average daily rate (ADR) and higher occupancy during the quarter.

Beyond the robust figures, Chan points out that CLAS’s extended stay segment remains resilient during the 3QFY2022. The trust also managed to maintain its low effective borrowing cost during the quarter, with a high proportion of its debts at a fixed rate, he adds.

That said, he notes that the strong Singapore dollar (SGD) will continue to impact the trust’s distribution per unit (DPU).

See also: CapitaLand Ascott Trust says 3QFY2022 gross profit at 90% of pre-Covid-19 levels

“The impact of foreign exchange after hedges in place on gross profit was 2.1% for 9MFY2022,” the analyst notes. “CLAS adopts a natural hedge wherever possible by borrowing in the currency of the underlying assets. A 5% depreciation in foreign currency implies a 3% impact to DPU.”

Looking ahead, Chan sees that forward bookings for the trust’s portfolio of properties indicate that there’s sustained pent-up demand with the return of more corporate and international travellers.

This will enable CLAS to increase room rates and abate rising utility and labour costs, he says.

See also: CGS-CIMB and OCBC increase TP for MPACT, maintain 'add' and 'hold' calls

In terms of capital management, the trust’s gearing of 35.8% as at Sept 30 means a debt headroom of $2 billion, which leaves room for it to reach its medium-term asset allocation of 25%-30% for longer-stay accommodation, notes Chan.

Despite the upgrade, Chan has lowered his target price to $1.13 from $1.24 previously. He has also lowered his DPU estimates for the FY2022 – FY2024 by 5%-7% on the back of headwinds in foreign currencies and an enlarged unit base from the trust’s private placement.

The analyst also pencilled in the acquisition of $318.3 million in assets that are expected to be completed in the 4QFY2022.

“Our cost of equity increased from 8.14% to 8.34% on a higher risk-free rate assumption,” he adds.

To Chan, catalysts include China’s reopening, “opportunistic divestments”, as well as acquisitions of extended stay assets. The acquisitions of such assets will raise the proportion of CLAS’s stable income sources to 25%-30% to cushion the impact from recessionary concerns, rising inflation and macroeconomic uncertainties.

UOB Kay Hian analyst Jonathan Koh is also upbeat on CLAS’s results, calling its business update an “ideal mix of recovery potential and resilient balance sheet”.

Keeping his “buy” call and target price of $1.27, Koh says he expects CLAS to see continued recovery from the pent-up travel demand.

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“4QFY2022 [may be] seasonally softer for corporate travel but forward booking for leisure travel remains robust,” he writes.

“CLAS is able to generate profitable growth by raising room rates to cover rising utilities and labour costs. It will benefit from full-year contributions of student accommodation acquired last year,” he adds.

In Japan in particular, Koh sees “bright prospects” for a strong recovery in the REIT’s Japanese properties, although it is likely to be offset by the weak Japanese yen (JPY).

“Japan lifted border restrictions on Oct 11, restored visa-free travel and removed the cap on daily arrivals. The government has introduced the National Travel Discount to boost domestic tourism. Japan will benefit from pent-up demand, while the weak JPY makes Japan an affordable and attractive destination,” Koh notes.

CLAS owns 23 properties in Japan, which accounted for 18% of total assets.

As Koh keeps his DPU forecast for CLAS intact, he sees yield-accretive acquisitions for student accommodation and rental housing as well as the full-year contributions from CLAS’s maiden development project, lyf one-north in 2022, as catalysts to its unit price. The recovery of the hospitality industry in Europe, US, Japan and Singapore, followed by other countries in the Asia Pacific (APAC) region, are also catalysts to CLAS’s unit price.

As at 4.58pm, units in CLAS are trading 4 cents lower or 4.06% down at 94.5 cents.

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