Monday, January 25, 2010

Ascott REIT - Buy by OCBC (25 Jan 10)

The following is a report by an analyst from OCBC, Meenal Kumar. The analyst's immediate family owns 419,000 shares of Ascott REIT. Compared to my current holdings of 12,000 shares, that is indeed a far cry.
Ascott REIT recently announced DPU of 3.77 cents with payment to be made in Feb 2010.
4Q09 in line with our estimates. Ascott Residence Trust (ART) posted S$46.1m in 4Q revenue, down 2.4% YoY but up 3.8% QoQ. ART will distribute S$11.5m, up 11.8% YoY but down 2.5% QoQ. This is equivalent to 1.87 S cents DPU, just 1.5% shy of our estimate of 1.90 S cents. ART booked an S$11.7m gain in property values versus June 2009. Overall RevPAU was S$124 compared to S$133 in 4Q08 (-6.8% YoY) and S$124 in 3Q09 (flat).

Tone of guidance positive. The manager said that it expects "improvement in hospitality demand in 2010 in line with the more positive economic sentiments, though the extent of the economic recovery is uncertain." Occupancy levels have stabilized and in some markets, approaching levels where there is scope for rate increases. The manager did say that visibility was still limited, and 1Q10 results would bring more clarity. ART will "seek accretive acquisition opportunities to expand [ART's] portfolio". It sees opportunities in China, Vietnam, India (a new market for ART) and potentially Singapore.

Full speed ahead on asset enhancement plans. ART reiterated it is taking advantage of the occupancy lull to press ahead on asset works. The manager guided that it is targeting refurbishments of five properties each in 2010 and 2011. This includes Somerset Liang Court and Somerset Grand Cairnhill in Singapore and Somerset Grand Hanoi in Vietnam. These properties were last refurbished 10-12 years ago. The planned works will be funded using a combination of debt and operating cash flows.

"Comfortable" with current leverage quantum. The manager said that bank commitments & existing facilities are sufficient to re-finance debt maturing in 2010 (15% of total outstanding). It has already initiated talks with lenders on refinancing the much larger proportion of debt due in 2011 (59% of total). ART also said it was satisfied with current leverage of 41.2%, and is comfortable going up to 45-50% debt-to-assets.

We still see value in ART as a recovery play. We had previously projected a flat FY10F RevPAU. Keeping 1) FY09 performance; 2) manager guidance; and 3) our expectations for a recovery in corporate travel in mind: we now expect a pick-up in RevPAU in Singapore, China and Australia this year itself. We hike up our FY10F revenue and distributable income estimates 7-10% over previous estimates. We have also adjusted our WACC assumption down slightly. Our fair value estimate is accordingly up 10% from S$1.25 to S$1.38. Maintain BUY.

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