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Ascott Residence Trust upgraded to 'buy' amid coronavirus uncertainty: Phillip Securities

Stanislaus Jude Chan
Stanislaus Jude Chan • 4 min read
Ascott Residence Trust upgraded to 'buy' amid coronavirus uncertainty: Phillip Securities
“The recent collapse in the share price due to the uncertainty caused by the Novel Coronavirus presents a good entry price, in our opinion,” says Phillip Securities Research analyst Natalie Ong.
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SINGAPORE (Feb 5): Even as uncertainty over the novel coronavirus outbreak has battered investor confidence in Singapore real estate investment trusts, analysts are staying positive on Ascott Residence Trust (ART).

Phillip Securities Research is upgrading its recommendation for ART to “buy”, from “accumulate” previously, and raising its target price by 12.5% to $1.53.

“The recent collapse in the share price due to the uncertainty caused by the Novel Coronavirus presents a good entry price, in our opinion,” says research analyst Natalie Ong in a Feb 5 report.

Over the past two weeks, units in ART have fallen 8.1% from its closing price of $1.36 on Jan 20.

The way Ong sees it, ART’s serviced residences attract a largely corporate clientele with longer average length of stays. This makes ART less likely to be crippled by the impact of the coronavirus outbreak compared to other leisure-driven hospitality REITs, she says.

“The management expects that travel volumes will be impacted in the short-term, as well as some cancellation of bookings. However, given ART has more long-term stays than short-term stays which are driven by corporate clients on project groups or secondment and less leisure-tourism dependent, we expect to be more protected than other hospitality REITs,” Ong says.

She notes that ART is trading at an “attractive” yield of 6.6% and price-to net asset value (P/NAV) of 0.94.

On top of ART’s positioning in the service residences space, DBS Group Research analyst Derek Tan points out that its well diversified portfolio also provides a “good buffer” against the coronavirus outbreak.

Tan estimates that ART’s portfolio has a mere 7.2% exposure in China post-merger with Ascendas Hospitality Trust (AHT).

“In addition, the more than timely divestments of Citadines Xinghai Suzhou and Citadines Zhuankou Wuhan will further reduce China exposure,” says Tan in a Jan 31 report. “Diversity remains a key defence against volatility in the hospitality sector.”

At the same time, Tan believes that ART’s asset recycling strategy will help to drive distribution per unit (DPU) growth.

“We like ART’s consistent asset reconstitution strategy, divesting assets that have achieved an optimal level of capital value growth and deploying them into other properties with higher returns and growth runway,” Tan says.

“With a gearing of close to 34%, below its typical gearing level of 38%-39%, there is ample room to grow inorganically,” he adds. “We have assumed $350 million of acquisitions in our estimates by middle of 2020.”

DBS is keeping its “buy” call on ART with a higher target price of $1.50, raised from $1.45 previously.

Market watchers are also keeping an eye on the possibility of ART’s inclusion into the FTSE EPRA NAREIT Developed Index.

“ART stands a strong chance of being included in the FTSE EPRA NAREIT Developed Index in the March 2020 review,” says Maybank Kim Eng Research analyst Chua Su Tye in a Jan 31 report.

All three analysts believe ART will be a candidate during the upcoming index review as it has met all the criteria.

Post-merger, some 79% of its EBITDA now comes from developed markets, and its freefloat has also increased to $2.5 billion – surpassing the $1.7 billion threshold index requirement.

But while the analysts agree that inclusion into the index could provide a near-term catalyst, Maybank’s Chua opines that ART’s dividend yield and DPU growth forecasts trails its peers amid a sector recovery.

“We prefer CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FEHT) for RevPAU recovery in 2020,” Chua says.

Maybank has a “hold” recommendation on ART with an unchanged target price of $1.40.

In 4QFY2019 ended December 2019, ART reported distribution per stapled security of 2.27 cents, some 6% higher than DPS of 2.15 cents a year ago.

The increase was largely attributable to the one-off divestment gain from Ascott Raffles Place Singapore. Excluding one-off items, 4Q DPS would have been 6% lower than a year ago.

The 4Q DPS, which will be payable on Feb 10, 2020, brings ART’s DPS for year-to-date 2019 to 7.61 cents, 6% higher than DPS of 7.16 cents for the corresponding period a year ago.

4QFY2019 revenue dipped 2% to $134.1 million, from $136.5 million a year ago, on the back of the divestment of Ascott Raffles Place Singapore and Somerset West Lake Hanoi.

Unitholders’ distribution for 4QFY2019 rose 6% to $49.3 million, including a one-off partial distribution of divestment gain of $13.5 million to replace lost income and to share divestment gains with unitholders.

See: Ascott Residence Trust posts 6% rise in 4Q DPS to 2.27 cents on one-off divestment gain

As at 3.45pm, units in ART are trading 1 cent higher at $1.25.

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