ART – CIMB

Asian growth less than ideal

• Below expectations; downgrade to Underperform from Outperform. 3Q10 results were below Street and our expectations with DPU of 1.93cts (excluding new placement units) forming 23% of our FY10 forecast (we had expected 26%) due to lower-than-expected growth in REVPAU. YTD DPU forms only 65% of our estimate. We factor in equity fund-raising, contributions from its European portfolio and moderated REVPAU assumptions for the Philippines and Vietnam. As a result, we cut our DPU estimates by 7-10% for FY10-12. We also roll over our target price to end-CY11. Our DDM target price (discount rate 8.3%) falls to S$1.24 from S$1.35. Although ART does not appear too expensive at about book value (proforma NAV S$1.28) and dividend yields are in line with the SREIT average, we downgrade it to Underperform, recommending a switch to SREITs with more Singapore-centric assets as: 1) Asian growth (other than Singapore) has not been as strong as anticipated; 2) the addition of its European portfolio will dilute the growth impact from Asia; 3) forex risks and tax leakages have increased; and 4) limited price upside. These are expected to provide de-rating catalysts.

• YTD distribution falls short with fewer non-tax deductible items. 3Q10 DPU of 1.93cts (excluding new units) was not strong enough to pull up YTD DPU as we had expected a strong quarter to make up for 1H10. 9M10 DPU of 5.46cts (excluding new placement units) forms only 65% of our FY10 forecast which had not accounted for its European portfolio. Fewer-than-anticipated non-tax deductible items and higher-than-expected taxes were the main reasons. Actual DPU to be paid taking into account new units issued would be 5.38cts for 9M10.

• Expect higher taxes from Europe. Compared to our forecast of 8.35cts in our last report dated 23 Aug following its European acquisition, our DPU forecasts have been cut by 5% on higher assumptions of corporate taxes for its European portfolio (estimated at 28%).