ART – CIMB

2H catalysts sighted

• 1H10 results broadly in line; maintain Outperform and target price of S$1.35. 2Q10 DPU of 1.87cts was broadly in line with our forecast (23% of our FY10 estimate) and the Street’s (24% of full year). 1H10 DPU of 3.53cts forms 43% of our FY10 forecast (45% of consensus), as Singapore grew slightly less quickly than expected due to ongoing refurbishment. Nonetheless, we are keeping our estimates and DDM-based target price of S$1.35 (discount rate 8.3%), in anticipation that Singapore’s 2H would catch up with refurbished units able to command higher rents. Management is also exploring divestment and acquisition opportunities. We see catalysts form an anticipated strong 2H as well as potential acquisitions.

• Performance up 3% qoq. Gross profit was S$20.8m, up 3% qoq. Positive qoq growth in Singapore (+8%, higher occupancy and rates), Australia (+25%, mainly on strengthening A$ against S$) and China (+32%, higher rates and occupancy with World Expo in Shanghai) was diluted by poor performances in Indonesia (-18%, higher operational expenses due to currency differences), and the Philippines (-9%, higher utility rates), as well as a flat performance in Japan.

• RevPAU up 5%; Singapore to shine in 3Q. Portfolio RevPAU was S$125/day, up 5% from one year ago. Excluding units taken out for refurbishment, Singapore’s occupancy was above 90% in 2Q10. Management expects strong 2H growth of 25-30% hoh in Singapore, moderate growth of about 5% in China and the Philippines; and flat performances in Australia, Indonesia, Japan and Vietnam.

• Exploring divestment and acquisition opportunities. Divestment targets are assets whose rental growth has stagnated but with sharply appreciating asset values. Acquisition targets are likely to come from the parent Ascott which still has more than S$1.2bn worth of assets in the Asia Pacific. Management is comfortable with a 45% long-term gearing, and all potential acquisitions would have to be accretive with a combination of debt and equity funding. ART has debt headroom for S$179, or up to 45% asset leverage.