ART – OCBC

Potential headwinds may tamper growth

Global air travel softening. The IATA has recently revised its yearly profit outlook for the global airline industry with a 54% cut from US$8.6b three months ago to US$4.9b. This represents an almost 80% nose-dive from last year’s US$18b profit. Total passenger traffic is also expected to grow by just 4.4% this year compared to last year – slower than the 5.6% forecast three months ago. Asia Pacific is expected to be the most profitable while Africa is deemed the worst performer. Airlines also continued to be plagued by high taxes imposed by European governments and exorbitant charges imposed by some airports and service providers. We think ART’s hospitality growth, with its 43.2% and 10.7% exposure (asset values) in Europe and Japan respectively as of 31 Mar, may be tampered by the easing of air travellers ahead.

Euro Debt Woes. In Europe, business sentiments continue to be plagued by lingering debt crisis. Moody downgraded Greece credit rating from B1 to Caa1 (on par with Cuba). Italy and Belgium’s rating outlook were also cut from stable to negative by S&P. In UK and France where ART has the largest exposure in Europe (16.6% and 21% respectively), inflation and unemployment rates remain stubbornly high. The British recorded an inflation of 4.5% in Apr and unemployment of 7.7% for 1Q11. In France, inflation is 2.1% in Apr while unemployment is 9.7%, only slightly lower than the peak of 9.9% registered during the financial crisis. We noted that ART’s Citadines properties in France are on master leases and this provides some form of safeguards against deteriorating economic conditions. However, we remain wary of the prospects of ART’s properties in UK, Belgium and Spain, on the back of further fiscal tightening and rising inflationary pressures. The performance of the service residences industry has historically been correlated to GDP growth and FDI inflows, and the current state of affairs in UK, France, Belgium and Spain certainly suggests a less positive outlook.

Singapore’s prospects better. According to STB, international visitor arrivals reached 3.12m in 1Q11, representing a 15.7% YoY growth. RevPau also increased 15.7% YoY to S$191, on the back of robust performance in both room rates and occupancy rates. ART, with its largest asset exposure in Singapore (21.5%), looks poised to benefit from the uplift in its home country. Nonetheless, given ART’s exposure in Europe and Japan, its share price may face further secular headwinds in the form of weakening demand and continued inflationary worries. Maintain BUY albeit with a reduced fair value of S$1.30 (prev: S$1.34).