ART – OCBC

COMPELLING RISK-REWARD – UPGRADE TO BUY

•LT downside for European assets capped

•Diversified portfolio to buffer risks

•Attractive yield and undemanding PB

Re-evaluating ART’s risk-reward proposition.

As European concerns reach an interlude after the recent Greek bailout, we re-evaluate ART’s risk-reward proposition by conducting a bottom-up analysis of its asset exposure. Currently, 40% of ART’s assets fall in Europe, spilt mostly between France (21%) and the UK (15%). In our view, while French and UK GDP growth are likely curtailed over FY12-13, we now see lower odds of long-term economic fractures given limited data-points pointing to a catastrophic fall-out to date.

LT downside for French and UK assets likely limited.

We note four of ART’s 17 properties in France (half of total French asset value) are situated in core Paris and are unlikely to face significant long-term capital-value downside due to their prime quality and locations. Moreover, ART’s French portfolio is wholly run under master leases with limited near-term income downside. Similarly, all four of ART’s UK properties are in prime London regions near under management contracts with minimum guaranteed income clauses.

Diversified asset exposure by geography and contract types.

ART’s remaining 60% asset exposure outside of Europe is mostly diversified in Asia between developed economies (Singapore 22%, Japan 14%) and developing economies (22%). Going forward, we expect that ART’s well diversified asset portfolio, both in terms of geography and management contracts types, would help buffer it against region-specific or short-term financial shocks.

Upgrade to BUY – attractive yield and margin of safety.

At this juncture, we judge that ART shares are attractive given a robust yield of 7.9% which should underpin the share price, and an undemanding P/B ratio of 0.8x which provides a reasonable margin of safety for bear case fair-value write-downs. Re-financing risks are also fairly limited with ART’s relatively healthy gearing of 41% and a maturity profile that is well-spread out. We update our model and upgrade to BUY with an increased S$1.12 fair value estimate (versus S$0.98 previously) mostly due to lower capitalization rates for European assets.