ART – CIMB

Forex dampener

ART's 3Q earnings growth was decent, but we expected a bigger boost from the London Olympics. UK RevPAU was resilient largely on the back of strong room rates post AEI. Revpau growth was again eroded by forex movements, the worst since 4Q08.

3Q/9M12 DPU met expectations at 25%/77% of our FY12 forecast and 26%/80% of consensus number. We adjust FY12-14 DPUs after factoring in the Hamburg acquisition and raise DDM-based target price for a lower discount rate of 8.2% (previously 8.5%). We remain Neutral given the lack of catalysts.

Decent growth

3Q12 growth of 6% yoy for revenue and 2% for gross profit were decent but fairly unexciting as a stronger 3Q had been expected. Group RevPAU edged up 1.4% yoy, led by the pan-Asian portfolio and the UK, offset by Europe. The euro's depreciation against S$ continued to erode gains in RevPAU and gross profit for the European portfolio (3Q: 43% of gross profit). Rental income will see a future boost from Ascott Raffles Place and Ascott Guangzhou acquisitions (completed in 3Q12) and Madison Hamburg (complete by 4Q12), offset by closure of Somerset Grand Cairnhill.

Smaller London boost

UK was resilient but slightly below expectations, with RevPAU +9% yoy and flat qoq from higher room rates post-refurbishment and close to 90% occupancy during the Olympics. Enhancements of its properties in Brussels, Jakarta and Spain should strengthen room rates in the next few quarters. Ascott's occupancies have proven fairly resilient in London (75%) and European cities (>70%), 5-10% pts below peak levels.

Europe opportunities but forex woes

On a portfolio basis, forex movements worsened for another quarter to -2.8%, bordering on the +/-3% range acceptable to management, led by Europe. We see the hedging of the euro as a possibility going forward. While macro conditions present opportunities for acquisition of higher-yielding assets, exposure to forex risk, a key concern, is also heightened.