AscottREIT – CIMB

2013: acquisition-led growth

ART’s results were in line with expectations, with FY13 results forming 97% of our forecast and 95% of consensus’s. We maintain our Hold rating, but raise our DDM-based target price (discount rate unchanged at 8.5%) to S$1.20. Our target price and DPS increases c.4% as we adjust for higher AEIs and ADR growth post their completion.

Acquisition-led growth

Growth in 2013 was largely acquisition-led and we expect the same for 2014. Properties worth a total of S$287m in China and Japan were acquired in 2013 at 5.4% annual EBITDA yield. These properties will make their first full-year contribution in 2014 and should continue to generate revenue growth. Given the rights issue and management’s guidance, we expect 2014 growth to be underpinned by acquisitions as well. The first acquisition should happen in the next three months and is likely to be located in China, Japan, Malaysia and Australia.

Same-store growth remains subdued on refurbishments

ART carried out about S$27m in refurbishments on selected properties in 2013, which contributed to lower gross profits in Australia, Indonesia and China on a same-store basis. Refurbishments for 2014 are likely to be about S$50m, largely targeting Vietnam, China Tianjin and Indonesia. Despite the larger scale of asset enhancement initiatives (AEIs), we expect the disruption to gross profit to be mitigated as properties in Vietnam and China Tianjin have lower occupancies. With several AEIs set to complete in 1Q2014, we expect same-store growth in refurbished properties to improve in 2014.

Maintain Hold

ART has rebounded about 6% since plummeting to a low of S$1.17 after its rights issue in Nov 2013. Given the lack of meaningful catalysts, we suspect this is partly due to speculation on its acquisition. We maintain our Hold rating as the stock is currently trading at 7.0% FY14 dividend yield, below its peer average of 7.4%.