Targets in sight

• Pre-emptive fund raising suggests potential acquisitions

• S$300m acquisitions assumed; re-rating catalysts to hinge on clarity of potential targets

• BUY, TP raised to S$1.53

Pre-emptive placement boosts acquisition kitty by S$150m. Ascott Residence Trust (Ascott REIT) recently completed a private placement exercise, which boosted its acquisition kitty by an additional S$150m. The issue price for the new units at $1.305 implies a 4.6% discount to the adjusted VWAP on 28 Jan 13 (placement agreement entered into with the placement agents) and a c3% discount to its latest reported NAV/share. A pre-emptive exercise with no targets identified at this point, with proceeds to be utilised across a myriad of uses – potential acquisitions, asset enhancements or debt repayment.

Awaiting deployment of proceeds, assuming acquisitions of S$300m in forecasts. We believe that proceeds will be utilised towards value accretive and yield enhancing acquisitions. Management is reviewing opportunities in the region and has previously alluded to be focusing on higher growth markets within Asia. We now factor in S$300m worth of acquisitions (@ 6.0% yield) in our forecasts, assuming a target post acquisition gearing of c39%. We estimate that every additional S$50m in acquisitions will raise gearing by 1 ppt, and DPU estimates and our TP by c.1%-1.5%.

Acquisition driven re-rating, BUY, TP revised to S$1.53. The stock price has declined c5% post placement, which we believe is due to the lack of clarity in acquisition targets but expect management to execute opportunistically soon. While slight dilution in DPU is expected prior to actual deployment of funds, we expect this to be compensated by a higher growth rate from FY14F onwards. BUY, TP raised to S$1.53 after factoring in acquisitions.

Raises S$150m through private placement

• Acquisitions more likely
  
• Advanced distribution
  
• Maintain HOLD
  

Private placement

Ascott Residence Trust has raised gross proceeds of S$150m through a placement of 114.9m new units at an issue price of S$1.305 per new unit, representing a discount of ~4.6% on the adjusted VWAP of S$1.3685 per unit for trades done on the SGX-ST on 28 Jan. The placement will increase ART’s free float from 51% to 55%. ART received participation from existing and new institutional investors from Asia, the United States and Europe.

Use of proceeds

The proceeds will be used to fund potential future acquisitions, finance AEIs, repay existing debt and for general working capital. Assuming that the net proceeds of S$147.9m are used to repay existing debts, the private placement is expected to reduce ART’s aggregate leverage from 40.1% to 34.9%. As of 31 Dec 2012, S$167.8m of debt was due to mature in 2013 for ART. At the FY12 results briefing a few days ago, management stated that it is comfortable with gearing between 40-45%, hence even if the proceeds are used to pay off the debt that is maturing, we think the additional financial flexibility from the placement will likely be utilised over the longer run for yield-accretive acquisitions. That said, we will incorporate future acquisitions into our model if and when they are announced.

Advanced distribution

There will be an advanced distribution of between 0.59 cents and 0.63 cents per unit to existing unit-holders. The advanced distribution is taken from ART’s distributable income from 1 Jan 2013 to 5 Feb 2013, which is the day before the date on which new units will be issued. The next distribution will be for 6 Feb to 30 June 2013 and semi-annual distributions will resume thereafter.

Reduce FV to S$1.36

We maintain our HOLD rating but reduce our FV from S$1.37 to S$1.36 due to the dilutive effect of this placement.

Headwinds persist in 2013

We see more headwinds in 2013, with Asia facing margin pressure and currency fluctuations across the board, albeit mitigated in part by downside protection on >40% of portfolio earnings. Acquisitions and pick up in demand for serviced residences are re-rating catalysts.

4QFY12 met our and consensus expectations at 23%/100% of our full year estimates. We lower FY13-14 DPUs on lower margins and introduce our FY15 estimates. DDM-based target price inches down slightly (disc rate: 8.2%). Maintain Neutral.

Lower margins and revaluation deficit

4Q12 gross profit dipped by 4% yoy (3Q: +2%) on higher staff costs and commission expenses. The European portfolio held up operationally. UK’s refurbishment and acquisition of the Hamburg asset boosted its European revenues, but forex movements again eroded the positives. Gross profit for Europe dipped 1% yoy. In Asia, performance was unexpectedly weak as higher operational costs, VND/SGD depreciation and divestments offset contributions from acquisitions and uptick in demand. Weaknesses in Vietnam and Indonesia led to 5% yoy decline in RevPAU to S$139.

Forex fluctuation dipped below -3% limit

Forex fluctuation exceeded internal +/-3% limit, hitting -3.3% on a portfolio basis (-2.8% in 3Q12) led by foreign currency weakness across the board since Dec 2011. While cashflow hedging of Euro and GBP may be considered, management expects forex impact to be mitigated by more stable European economies in 2013.

Expect acquisitions

We continue to expect growth from acquisitions and refurbishments this year, offset by lower margins in Asia and more negative forex fluctuations. A revaluation deficit of S$27.9m was recognised in 4Q12 due to Vietnam, France and Philippines. Management is most concerned about Vietnam (c.15% of gross profit) given cost pressures and slower corporate travel.

An eye on high growth Asia

• 4Q12 results in line
  
• Moderate outlook with bright spots in Asia
  
• An eye on growth, TP raised to S$1.49
  

4Q12 DPU of 2.0 Scts in line. Ascott Residence Trust (Ascott REIT) reported 4Q12 distributable income of S$22.8m (DPU of 2.0 Scts) which was 10% higher y-o-y on the back of a 1% growth in topline to S$75.9m. This was due to the income contribution from its 4 newly acquired properties while portfolio RevPAU saw a slight dip of 5% to S$139/night. Translation impact on gross profits remains manageable at -3.3%.

Moderate outlook but with bright spots within Asia. While there is a general cautious mood amongst corporate clients, Ascott REIT will be taking a more active management role in starting refurbishment programs in order to refresh their product and raise room rates to optimise returns. There were bright spots noted in operations like China, Philippines, Indonesia and UK (combined forms c37% of FY13F topline), which are seeing improved demand while the remainder of its operations are expected to remain fairly stable, except for Vietnam, where there is increased competition.

An eye on growth, BUY TP S$1.49. We maintain BUY with a higher TP of S$1.49 after tweaking our forward RevPAU estimates and ascribing a lower discount rate. Looking ahead, management remains focused on growing its presence in growth markets in Asia and is reviewing opportunities to acquire in the region. Assuming a target initial yield of 6.0%, a debt cost of 3.5% and keeping gearing constant, we estimate that acquisitions of up to S$500m could boost DPU by up to 10.1% and add a further S$0.10 to our TP.