ART – OCBC

Upgrading to Buy on valuation

Results benefited from recent acquisitions. Ascott Residence Trust (ART) reported a good set of 3Q07 results with both revenue and distributable income higher than its own forecast. Revenue came in at S$42.3m (9% above forecast) and distributable income came in at S$12m (9% higher than forecast). The better performance was due to out-performance in Singapore, Philippines and Vietnam. All 3 had better-than-expected revenue per available unit (RevPau). DPU was 1.99 cents, better than our estimate of 1.70 cents. In light of the good performance, we are adjusting our FY07 and FY08 forecast from 6.8 cents and 6.9 cents to 7.65 cents and 8.01 cents, respectively.

Star performer was Vietnam. In 3Q07, China was most important in terms of revenue contribution (24% of group revenue). However at the gross profit level, it only provided 23% of group profit, this is well below the 27% contribution by Vietnam. More importantly, Vietnam was the most profitable segment, providing a gross margin of 61%, with Singapore in second place at 54% followed by Japan at 45%. China is well behind at only 42%.

Acquisition to continue to drive earnings. Year to date, ART has acquired S$144m worth of properties, and this has boosted its portfolio from 12 properties (at IPO) to the current 18 properties. Presently ART’s asset value stands at S$1.26b but management has guided a size of S$2.0b by end 2008. This implies that ART will be buying S$0.74b worth of assets over the next 12 months. Currently, ART has a gearing of 29%, and with a capacity to gear up to 60%, ART has a debt capacity of S$620m. This means that the bulk of the acquisitions that ART will do is likely to be “free” accretion to unit-holders as it is likely to be debt funded. We anticipate an equity cash call only in late 1H08 or 2H08.

Upgrade to BUY on valuation. Finally since our last report, ART has corrected from S$1.85 to last traded price of S$1.58. More importantly, the price correction means that ART’s price to book ratio has come down from 1.34x (April) to the present 1.14x. In our opinion this does not reflect the expected strong acquisition growth that management has guided. We continue to like ART and our previous HOLD rating was purely on valuation grounds. In light of the recent correction, we are upgrading our rating on ART from HOLD to BUY and maintaining our fair value of S$1.94.