ART – Kim Eng

Ascott REIT

Previous day closing price: $0.98
Recommendation: Buy (upgraded from Hold)
Target price: $1.23 (up from $0.77)

Upgrade to Buy from Hold
Located in gateway cities of Asia, ART’s assets are poised to benefit from the Asian economic recovery, which will drive REVPAU growth in its key markets such as Singapore, China, Vietnam and Philippines. According to the management, REVPAU appears to have bottomed and results in 2H09 are likely to beat our previous forecasts.

Asian asset portfolio to ride on recovery
The ADB has just raised its economic growth forecast for Asia. Demand for travel is picking up, with tourist arrivals in Singapore showing the smallest yoy decline in August; The IATA had reported a strong improvement in the passenger demand of Asia Pacific carriers; Major hotel chains in Asia are anticipating growth and still expanding in 2009 despite the downturn. Finally, the opening of Singapore’s IRs is expected to draw a throng of expatriates, boosting REVPAU.

On the prowl for acquisition targets
Besides organic growth, ART could also begin to tap on its sponsor’s sizeable pipeline of assets in Asia for acquisitions. Based on indicative cap rates for serviced residences, Vietnam shows up as an attractive target market (9-10%). The sponsor, Ascott Group (100% owned by Capitaland) has some 1182 units of serviced residences in Vietnam, which could potentially be injected into ART. ART is also keen to invest in India, possibility through an asset injection from its sponsor.

Gunpowder for acquisitions
Our stress test shows that a further 10% decline in ART’s portfolio asset value will lift gearing from 40.7% to 45.2%. Although ART is comfortable with a gearing of around 45%, we believe this level is unsustainable given the higher prospects for acquisitions. Being committed to protecting shareholders’ value, ART has indicated that an equity-raising will only be done when there are confirmed acquisition plans.

Raising target price to $1.23
We forecast REVPAU growth of 5-20% across the key markets. Our DPU forecast for FY09-10F have been raised by 2-13%. Applying a normalized cost of equity (8.8%) and terminal growth rate of 2%, our DDM-derived target price has been raised to $1.23 (prev. $0.77). We upgrade ART to Buy.