ART – MS

Doubling Asset Base & Going Beyond Asia; Raise PT

Raise PT on reduced earnings volatility: ART on Friday announced the acquisition of 28 serviced residence properties from sponsor The Ascott Limited (TAL) valued at S$1.2bn (S$0.8bn net of debt and current assets). Management plans to fund this via divestment of Ascott Beijing to TAL; proposed equity fund raising of ~S$561mn; and S$116mn in debt financing. If completed, we see improved earnings stability from diversification into Europe and from greater earnings contribution from master leases and guaranteed income contracts. We believe the resulting value accretion more than offsets the dilution from lower growth properties in Europe. We lower our growth assumptions and adjust WACC by -0.75% to account for reduced growth but improved stability in the earnings profile, lowering 2010/11/12e DPU by 7%/6%/7% and raising ART’s PT by 10% to S$1.30.

Asset base doubles: In an environment where acquisition opportunities are few, we like that ART has managed to double its asset base, and believe that the growth in scale has clear benefits on visibility and investibility of the stock. Retaining a pipeline of up to 5,900 serviced residence units in Asia, and expanding the right-of-first-refusal grant to include Europe, sponsor TAL also continues to show support by undertaking its 47.7% pro-rata share of the share offering, and we expect the overhang of dilution to be limited.

Investment thesis: We maintain our Equal-weight weighting on ART. While variable income is largely derived from Asia, providing positive exposure to Asian growth, ART’s new fixed income base is substantial. Furthermore, marginal earnings accretion despite the scale of the transaction and the impending equity raising could also cap any near term positivity in sentiment.