ART – CIMB

Lacking catalysts

ART came in with a decent 1Q12. However, there are some concerns on cost pressures in certain markets and forex swings. While performance should pick up in 3Q with the London Olympics, we see a lack of compelling catalysts to spark a major rerating.

1Q12 DPU was broadly in line with estimates, forming 25% of our full-year estimates. We raise DPUs marginally, factoring in its recent acquisitions and REVPAU changes. Maintain Neutral with higher DDM-based target price (discount rate: 8.5% vs. 9.1% previously).

Decent quarter

Performance was decent despite 1Q being typically the seasonally weaker quarter. Performance is expected to pick up in 3Q with the London Olympics. 1Q12 gross profit was up 2% yoy as increased staff, maintenance and other costs eroded a 6% rise in revenue. The traditionally stronger Singapore market failed to perform probably due to weaker corporate travel, with revenue flat and gross profit up 4% yoy only due to a reversal of provisions. Growth in the quarter came instead from the Philippines, UK and China.

Europe flat

European portfolio’s revenue was marginally up 2% yoy though gross profit was down 3% on higher staff costs in Spain and provision of incentive fee in UK. Revenue from UK rose on higher rental rates at Citadines Prestige Trafalgar Square London post-refurbishments, and is expected to see a tick-up in 3Q as the London Olympics approaches.

Widening forex swings

We are slightly concerned with FX swings with forex movements widening to -2.1% from 4Q’s -1.2%, and particularly given MAS’s stance on a faster appreciation of the S$. Management has so far continued to manage its exposures through revenue/opex matching and natural hedge. That said, it is monitoring FX fluctuations associated with remittance and would, where feasible, hedge these currency risks.