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.

Ascott Q1 DPU stays at 2.14 cents

Annualised yield of 7.8% based on trust's $1.10 price

ASCOTT Residence Trust's first-quarter distribution per unit remained unchanged from a year ago on the back of a modest 6 per cent increase in revenue.

Unitholders' distribution for the three months ended March 31 rose one per cent or $0.2 million to $24.2 million. This translated to a distribution per unit of 2.14 cents, an annualised yield of about 7.8 per cent based on yesterday's $1.10 closing price.

Revenue for the quarter came in at $71.6 million, up $4.3 million or 6 per cent year on year. This was due mainly to contributions from Citadines Shinjuku, which was acquired in December last year, and a better showing from the group's serviced residences in countries such as the Philippines, China and the United Kingdom.

Ronald Tay, chief executive officer of Ascott Residence Trust Management Limited (ARTML), said: "Revenue per available unit (RevPAU) in China, the Philippines and United Kingdom grew by 22 per cent, 15 per cent and 9 per cent respectively over the same period last year, mainly led by better operating performance.

COMPELLING RISK-REWARD – UPGRADE TO BUY

•LT downside for European assets capped

•Diversified portfolio to buffer risks

•Attractive yield and undemanding PB

Re-evaluating ART’s risk-reward proposition.

As European concerns reach an interlude after the recent Greek bailout, we re-evaluate ART’s risk-reward proposition by conducting a bottom-up analysis of its asset exposure. Currently, 40% of ART’s assets fall in Europe, spilt mostly between France (21%) and the UK (15%). In our view, while French and UK GDP growth are likely curtailed over FY12-13, we now see lower odds of long-term economic fractures given limited data-points pointing to a catastrophic fall-out to date.

LT downside for French and UK assets likely limited.

We note four of ART’s 17 properties in France (half of total French asset value) are situated in core Paris and are unlikely to face significant long-term capital-value downside due to their prime quality and locations. Moreover, ART’s French portfolio is wholly run under master leases with limited near-term income downside. Similarly, all four of ART’s UK properties are in prime London regions near under management contracts with minimum guaranteed income clauses.

Diversified asset exposure by geography and contract types.

ART’s remaining 60% asset exposure outside of Europe is mostly diversified in Asia between developed economies (Singapore 22%, Japan 14%) and developing economies (22%). Going forward, we expect that ART’s well diversified asset portfolio, both in terms of geography and management contracts types, would help buffer it against region-specific or short-term financial shocks.

Upgrade to BUY – attractive yield and margin of safety.

At this juncture, we judge that ART shares are attractive given a robust yield of 7.9% which should underpin the share price, and an undemanding P/B ratio of 0.8x which provides a reasonable margin of safety for bear case fair-value write-downs. Re-financing risks are also fairly limited with ART’s relatively healthy gearing of 41% and a maturity profile that is well-spread out. We update our model and upgrade to BUY with an increased S$1.12 fair value estimate (versus S$0.98 previously) mostly due to lower capitalization rates for European assets.

Proactively strengthening

4Q was a decent quarter. Nonetheless, we believe fairly high asset leverage, threats to growth and forex risks could cast dark clouds over ART. With European exposure and the ongoing turmoil in Europe, ART’s share price could remain range-bound.

4Q/FY11 DPU is in line with consensus and our estimates, at 21%/98% of FY11. We raise DPU and DDM-target price (disc rate 9.1%) to factor in stronger Indonesia and Australia performances, offset by higher borrowing costs. We also introduce FY14. Maintain Neutral.

Decent 4Q

As corporates tighten their belts and cut costs, we expect a slowdown in corporate travel. Nonetheless, ART’s 4Q gross profit was up 4% yoy on a same-store basis. The surprise came from stronger performances in Indonesia and Australia which benefited from stronger oil and gas industries. We raise our DPU to factor this in.

No major stress in Europe yet

In Europe, the UK continues to perform strongly while Belgium, France, Spain and Germany are generally stable. An unresolved eurozone crisis, however, continues to threaten ART’s European portfolio, although downside should be capped by master leases, management contracts with minimum guaranteed income and boosts from AEI.

Capital management

Management refinanced S$145m of debt in 4Q, lowering debt maturing in FY12 to 22% of total borrowings. It also secured S$250m MTN facilities to refinance some loans ahead of expiry to spread out its debt maturity. Through this, loan tenure has been extended to 3.4 years while debt due in 2012 has been brought down to 22% from 35%. While asset leverage has dipped to 41% from 42% on higher asset revaluations, we remain slightly concerned about devaluation risks on a full-blown eurozone crisis.

One-off events pull down Ascott Trust DPU

Q4 payout is 1.83 cents; full-year payout up 13 per cent to 8.53 cents

DISTRIBUTION per unit for the fourth quarter at Ascott Residence Trust has fallen 15 per cent from a year ago and is 8 per cent below the trust manager’s forecast, due to costs incurred for one-off events in the quarter.

For the current year, ‘we expect operating performance of our properties to improve over 2011 based on source currency’, said Ascott Residence Trust Management Ltd CEO Chong Kee Hiong. However, this is likely to be offset by an estimated 50 basis point increase in interest expense in 2012.

What will be critical to the trust’s bottom line this year will be movements between the Singapore dollar and three currencies – the Vietnamese dong, the euro and the pound. Income received in these currencies account for about 60 per cent of ART’s gross profit on an annual basis.

When asked about the likelihood of ART making acquisitions, Mr Chong said that generally, buyers and sellers are likely to adopt a wait-and-see attitude in the first half due to market uncertainty. ‘Deals are more likely in the second half.’

DPU for the three months ended Dec 31, 2011 fell 15 per cent year on year to 1.83 cents. The latest quarter’s DPU was also 8 per cent lower than the 1.99 cents that ARTML had forecast in an offer information statement dated Sept 13, 2010.

This is due to costs incurred for one-off events in Q4 2011, including a $2.1 million provision for licensing-related matters for a service residence in China, about $500,000 for setting up a US$2 billion euro-medium term note programme to tap an enlarged pool of investors, and loan-related expenses and cash holding costs of $800,000 in conjunction with raising $250 million from the trust’s existing medium term note programme to refinance secured borrowings due in 2012, extend loan tenure and free up encumbered assets for greater financial flexibility.

‘This has resulted in a stronger balance sheet with reduced debt refinancing exposure in 2012, and a healthy debt maturity of more than three years with close to four times interest cover,’ said Mr Chong.

Excluding the above one-off cost items, the Q4 2011 unitholders’ distribution would have been $24 million (matching Q4 2010’s $23.9 million), instead of $20.6 million. ARTML’s forecast for Q4 2011 was $22.5 million.

The trust, which makes semi-annual payouts, will distribute 4.063 cents per unit for the July 1-Dec 31 2011 period. In the stock market yesterday, the counter closed unchanged at $1.005.

ART’s full-year 2011 DPU payout of 8.53 cents, which is up 13 per cent from 2010, represents 100 per cent of distributable income. The FY2011 DPU is 10 per cent above forecast.

Revenue for Q4 2011 rose 3 per cent year on year to $75.3 million. Revenue per available unit per day too improved 7 per cent to $146 – largely on the back of stronger performance from the group’s service residences in the UK, Singapore and Indonesia. The two figures also exceeded forecast by 2 per cent and 6 per cent respectively.

Full-year revenue rose 39 per cent to $288.7 million, while gross profit surged 55 per cent to $157.5 million. This was due largely to additional contribution from the 28 service residences acquired on Oct 1, 2010, partly offset by divestment of Ascott Beijing and Country Woods in Jakarta. On a same store basis, FY2011 revenue increased by 1.8 per cent to $165.3 million, and gross profit climbed 4 per cent to $81.1 million, led by Singapore service residences.

Unitholders’ distribution climbed 67 per cent to $96.2 million for FY2011.

ART has 65 properties with 6,600 units in 23 cities across 12 countries in the Asia-Pacific and Europe.

‘We will continue to implement asset enhancement initiatives to increase the returns of our portfolio. Operating performance of London properties is expected to be boosted by the completion of the renovation of Citadines Prestige Trafalgar Square and the upcoming London Olympics 2012,’ ARTML said in its results statement.