ART – DBS

More room to run

• Results above street estimates
• Stability emerging – 2H09 should turn stronger
• Upgrade to BUY, TP S$0.99, offering total return of 22%.

Results higher than street. ART reported a commendable set of results, beating market expectations but in line with our estimates. 2Q09 distribution income came in 17% lower yoy to $11m (DPU 1.79cts). This was achieved on the back of a 7% dip in revenue to $43m and an 11% drop in gross profit (GP) to $23.4m. Signs of stabilization are emerging with topline, GP and distribution income recording single digit growth on a qoq basis. The group wrote down value of its assets by $61m or 4% of total portfolio value, largely from its Japanese and Chinese assets. Thus, book NAV declined to $1.36/unit. Consequently, gearing rose to 41%.

Stability emerging. Operating condition was challenging in 2Q09 with RevPAU dipping to $119, hindered by Singapore and China segments. Weaker business demand and competition from new supply in Beijing and Shanghai were a drag on RevPAU. The slide was partially offset by better contributions from Australia, Philippines and Vietnam. Looking ahead, there are nascent signs of demand leveling out, particularly in Spore (15% of revenue) with more take up from project groups. Australia, Vietnam and Philippines are expected to remain fairly stable. Management indicated that the present gearing of 41% and ICR of 3.4x are still within their optimal target of 45% and
ICR of 3x, and is unlikely to tap capital markets in the near term.

Upgrade to BUY. We are raising our FY09 and FY10 DPU estimates by 0.7% and 6% respectively to 7.2cts and 7.4cts, on the back of an improving operating environment. We have also adjusted our TP to S$0.99, assuming a slightly higher terminal growth of 2%, which is not excessive, given that half of its portfolio is in emerging markets. ART is one of the key beneficiaries of the global economic recovery, given its focus on corporate medium term accommodation demand and diversified tenant base. Expectations of positive GDP growth in the Asia Pacific region as well as event driven catalysts, such as completion of the 2 IRs in Singapore next year, should likely have a positive impact on the longer stay market.