ART – CIMB

Headwinds persist in 2013

We see more headwinds in 2013, with Asia facing margin pressure and currency fluctuations across the board, albeit mitigated in part by downside protection on >40% of portfolio earnings. Acquisitions and pick up in demand for serviced residences are re-rating catalysts.

4QFY12 met our and consensus expectations at 23%/100% of our full year estimates. We lower FY13-14 DPUs on lower margins and introduce our FY15 estimates. DDM-based target price inches down slightly (disc rate: 8.2%). Maintain Neutral.

Lower margins and revaluation deficit

4Q12 gross profit dipped by 4% yoy (3Q: +2%) on higher staff costs and commission expenses. The European portfolio held up operationally. UK’s refurbishment and acquisition of the Hamburg asset boosted its European revenues, but forex movements again eroded the positives. Gross profit for Europe dipped 1% yoy. In Asia, performance was unexpectedly weak as higher operational costs, VND/SGD depreciation and divestments offset contributions from acquisitions and uptick in demand. Weaknesses in Vietnam and Indonesia led to 5% yoy decline in RevPAU to S$139.

Forex fluctuation dipped below -3% limit

Forex fluctuation exceeded internal +/-3% limit, hitting -3.3% on a portfolio basis (-2.8% in 3Q12) led by foreign currency weakness across the board since Dec 2011. While cashflow hedging of Euro and GBP may be considered, management expects forex impact to be mitigated by more stable European economies in 2013.

Expect acquisitions

We continue to expect growth from acquisitions and refurbishments this year, offset by lower margins in Asia and more negative forex fluctuations. A revaluation deficit of S$27.9m was recognised in 4Q12 due to Vietnam, France and Philippines. Management is most concerned about Vietnam (c.15% of gross profit) given cost pressures and slower corporate travel.