AscottREIT – CIMB

A seasonally weaker first quarter

1Q14 DPU formed 20% of our and 22% of consensus full-year forecast, slightly below from a seasonally-weak quarter. We note rising staff cost and slightly lower operating margins, but expect higher contributions from recent acquisitions in the coming quarters. ART’s strategy of stability through the extended-stay model and growth through AEI and acquisitions remains unchanged. However, its gearing of 35.9% is the highest among its hospitality peers, while FY14-15 dividend yields are slightly below peers. We reduce our FY14-16 DPU by 3-5% to adjust for slightly higher operating costs and our DDM-based target price (discount rate: 8.5%) falls accordingly. We maintain our Hold rating.

Operational highlights

Same-store revenue per available unit (RevPAU) rose yoy for most countries with management contracts as its properties recovered from a weak 2013. The bright spots were Japan, UK, and Belgium, which saw RevPAU in local currencies rising by 18%, 13% and 11%, respectively on stronger demand from corporate and leisure travellers. Philippines, accounting for 9% of revenue and 6% of gross profit in 1Q14, remained weak due to lower corporate accommodation budgets, higher staff cost and property tax. Foreign exchange risk is mitigated as ART has hedged c.60-70% of the distribution income derived in €, £ and ¥.

Growth from AEI and potential acquisitions

S$26m of asset enhancement initiatives (AEI) was completed in 1Q14 for selected properties, lifting renovated room rates by 17-25%. Further growth is expected from the S$29.3m of ongoing AEIs that are expected to complete in 2014 and 2015. To date, the Dalian and Japan acquisitions after the rights issue have utilised 77.7% of the S$253.7m that was raised last December. Additional yield-accretive acquisitions, possibly in China, Japan, Malaysia, Australia and Europe can provide further inorganic growth for ART.

Maintain Hold

While valuations appears attractive at 0.9x P/BV, we maintain our Hold rating as ART’s gearing is higher than most hospitality peers and FY14-15 dividend yields are slightly lower.