ART – CIMB

Not much downside from here

• 1Q09 results in line, RevPAU down 15% yoy. 1Q09 distributable income of S$10.8m and DPU of 1.77cts were in line with Street and our expectations, forming 25% of our full-year estimates. Yoy, revenue contracted 8%; qoq, the contraction was worse, at -12%. This was blamed on falling RevPAU in the key markets of Singapore (-32.7%), Australia (-23.3%) and China (-18.7%). Japan was the only country with positive growth (5.9%). RevPAU for the group fell 15% yoy. The weak performance was partially due to the typical business-travel lull period in the first and fourth quarters of the year. Lunar New Year holidays in January this year also slowed down travel more than usual in China.

• Net property income (NPI) margins up 3.5% pts qoq. NPI of S$19.9m for 1Q09 was down 16% yoy. On a positive note, the rate of qoq decline slowed to -5%, underpinned by good cost-control. NPI margins improved 3.5% pts from the last quarter, reaching 47.3% in 1Q09. The most significant qoq progress came from Singapore (+20.3%) and Japan (+11%).

• Negotiations for debt refinancing in progress. ART has S$111.6m of debt due for refinancing this year: 86% of this (estimated S$96m) will be due in Dec 09. Management has started negotiations for the refinancing of this debt. Asset leverage at 38.7% remained comfortable.

• Upgrade to Neutral from Underperform; no change in estimates and target price of S$0.56. We are satisfied with our projection of up to a 20% decline in full year RevPAU vs. ART’s performance in 1Q09, which is a traditionally weak quarter. Our DDM-derived target price (discount 10.5%) stays at S$0.56. With our recently revised STI target of 2,160, potential upside to our target for ART is 22%, in line with our expectations for the market. Current P/BV of 0.32x with a prospective 15.6% forward yield looks attractive relative to the sector average of 0.4x. We believe RevPAU and distribution are not likely to deteriorate much from here. Upgrade to Neutral on valuation grounds.