ART – CIMB

Changing seasons

• Maintain Underperform. ART’s 9M08 earnings performance had been good. However, management guides that the fourth quarter is typically the weakest. REVPAU in China which had surged during the Olympics Games is likely to normalise. The global economic downturn would have a material impact on international travel and the outlook looks bleak even for the serviced apartment industry.

• RevPAU cut by up to 20%. In line with our house view that the US financial crisis could result in a marked slowdown in Asia, we recently cut our REVPAU forecasts (a function of occupancy and average daily rates) by up to 20% per annum for the next three years. Separately, we removed all acquisition assumptions for FY09. We also raised our cost-of-debt assumption for ART to 3.5% from 4% for FY08.

• Unchanged DDM-derived target price of S$0.56 (discount rate 10.5%). Current P/BV appears attractive at 0.4x relative to the S-REIT’s 0.51x. However, price catalysts are likely to be limited with the cloudy outlook for leisure and business travel.