AscottREIT – UOBKH

2QFY08: DPU up 9% yoy to 2.19 S cents; FY08 annualised yield at 8.1%

2QFY08 DPU grew 9% yoy to 2.19 S cents. With 1QFY08 DPU of 2.33 S cents, 1HFY08 DPU amounted to 4.52 S cents, or 26% yoy higher, translating into an annualised DPU yield of 8.1% vs 10-year Singapore government bond yield of 3.4%. 1HFY08 DPU accounts for 54% of our FY08 DPU forecast of 8.3 S cents. 2QFY08 revenue increased 13% yoy to S$46.0m, mainly driven by Revenue Per Available Unit (RevPAU) growth. All markets except for the Philippines registered positive revenue growth. Acquisitions contributed 5.4% and 6.8% of total revenue and gross profit respectively in 2QFY08.

Overall RevPAU increased 6% yoy to S$143 in 2QFY08, with occupancy rate at a high level of 82% on average. Of its seven markets, Singapore, Australia, Indonesia and Vietnam achieved higher RevPAU growth in 2QFY08. The Singapore and Australia markets achieved double-digit RevPAU growth in the quarter. The China market’s RevPAU was 4% lower yoy as reconfiguration projects generated smaller rooms. The Japan and Philippines markets were hit by increased competition and softening demand.

Gross margin widened to 50.6% vs 45.0% in 2QFY07, but was lower qoq (51.4% in 1QFY08). Yoy margin improvement was mostly due to RevPAU growth and the addition of high-margin rental housing properties in Japan. On a qoq basis, ART’s gross margin was affected by higher labour and utility costs.

Comfortable gearing. ART’s gearing ratio (Debt/Asset) stood at 34.5%, well below the 60% limit allowed by the Monetary Authority of Singapore (MAS) and our optimal gearing assumption of 45%. As of Jul 08, debt that will mature in FY08 amounted to S$85.5m, or 15% of total debt. Management is confident ART has more than enough committed lines to refinance the debt.

Stable outlook. Compared with hotels, the longer-term leases of ART’s portfolio (more than eight months on average) could cushion it against shortterm economic shocks. We also believe corporate travel, the key segment that ART’s service residences target, is more resilient than leisure travel. ART has guided that most markets – including Singapore, Australia, China, Indonesia and Vietnam – could see a stronger 2H08 on a yoy basis, although likely to be weaker compared with 1HFY08 amid uncertainties over inflation and financial turmoil. Japan and the Philippines are expected to continue to be affected negatively by softening demand in 2HFY08. All in all, Management expects operating performance in 2HFY08 to remain stable.

Extensive exposure to diversify currency risks. ART’s extensive exposure in seven countries helps diversify currency risks. According to ART’s estimate, Forex volatility made an impact of only 1%, or S$3m, on gross profit in 1H08. Management still likes the Vietnam market and believes the robust demand for extended stay will lead to a strong operating performance. Management also believes that, as Vietnam portfolio’s room rates are contracted in US dollars, the key risks lie in the time lag for repatriating earnings to Singapore (normally 2-3 months).
ART is a BUY; target price of S$1.57. Our valuation is based on the discounted cash flow model (WACC: 7.3%, terminal growth rate: 2.0%). With FY08 DPU yield estimated at 7.4%, ART’s valuation is very attractive given ART’s unique position as the only hospitality REIT under CapitaLand and its growth potential.