ART – Kim Eng

Look beyond the blip

Event

ART’s 1Q10 DPU of 1.66 cents is 12% below our expectations and 6% lower yoy due to one‐off expenses. Revenue grew by 3% yoy to $43.5m, driven by higher overall occupancy rates. We expect better performance in 2H to be led by the Singapore and Philippine markets. ART should remain on track to meet our full‐year DPU forecast of 7.83 cents. We upgrade ART to Buy on valuation grounds.

Our View

ART’s improved performance was mainly led by a recovery in REVPAU in Singapore, the Philippines and China as hospitality demand increased in line with higher tourist arrivals and corporate travels.

The operating performance in Australia, Indonesia, Japan and Vietnam, which account for the remaining 52% of gross profit, should remain stable in view of strong occupancy rates, though partially offset by the pressure on room rates.

With gearing of 42.1%, ART has debt headroom of about $250m for acquisitions before hitting its maximum target of 50%. While asset enhancements and acquisitions remain its near‐term focus, asset divestment is also possible if the proceeds can be deployed towards yield‐accretive acquisitions. Loans of $399m are due for refinancing in 2011.

Action & Recommendation

Increasing tourist arrivals and corporate travel are key drivers for re‐rating. Asset divestment plans are still in the pipeline. We upgrade ART to Buy on valuation, based on forward yield of 7% and total return of 29%.