ART – DBS

1H08 Results in Line

Story: Ascott Residence Trust (ART) turned it a stable 2Q performance. Gross revenues grew 13% yoy to $46m and net property income grew by 27% to $23.2m, coming in within 50% of our full year forecasts. Distributable income also grew 10% yoy to $13m in 2Q08, translating to a DPU of 2.19 cts for 2Q. ART also announced a distribution of 4.52 cts per unit for its 1H08 performance.

Point: Growth was largely derived from i) organic growth driven by the outperformance of its Singapore and Vietnam operations. On a same store basis, revenue contribution from existing properties grew 7% to S$43m and gross profit grew 19% to S$21.6m and ii) new contributions from asset acquisitions in Japan and Australia, adding $2.5m and $1.6m to revenue and net property income respectively. Outlook remains stable given that 55% of its rental income are signed on a long term basis, (> 6 months), average length of stay for the portfolio stands at more than 8 months. Outlook for its major markets, namely Singapore, Vietnam, China and Philippines remains stable in the face of a tight supply for quality serviced residence accommodation, forming a base for a sustained performance in near term.

Relevance: We continue to like ART for its exposure in the Asian mid-term hospitality sector that is still expected to remain firm in the medium term. As such we re-initiate coverage of ART with a BUY recommendation, target price of S$1.36 based on DCF. Our valuation methodology is based on a risk free rate of 3.9%, risk premium of 5.5% and a terminal growth rate of 0.5% with beta pegged to 0.8x, as per our S-REITs sector peers. The stock is currently trading at an attractive 7.9% FY08 and 8.2% FY09 DPU yield.