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SGX Stocks and Warrants

Author: kimeng   |   Latest post: Mon, 22 Jul 2019, 12:00 PM

 

Ascott Residence Trust: A Smaller Margin of Safety

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  • Portfolio of quality assets…
  • But tight valuations as at 24 Jun’s close
  • Switch to KDCREIT

Total returns of 24.5% since the start of the year

Ascott Residence Trust (ART) has posted total returns of 24.5% since the start of the year, as compared to the FTSE Straits Times REIT Index’s 20.0% and the Straits Times Index’s 10.1%. We had only caught part of the rally – we downgraded the REIT from Buy to Hold on 15 Apr 2019, and it has rallied 8.3% since then.

That said, we had previously noted in our 9 May sector report that we saw the most upside for ART out of all the hospitality REITs under our coverage. Indeed, ART has outperformed CDL Hospitality Trusts and Far East Hospitality Trust by 9.6% and 8.4% respectively over the same time period.

Trading at stretched valuations as at 24 Jun’s close

We believe ART’s YTD rally was supported by a flight to defensive safe names and a dovish bias from the Fed. While we continue to like ART for its highly geographically diversified portfolio of high quality assets, we believe valuations are stretched as at 24 Jun’s close. According to Bloomberg consensus, ART is trading at a 5.58% blended forward dividend yield, more than 2 standard deviations below its ten-year average. As at 24 Jun’s close, ART is trading at a 5.4% FY19F dividend yield (our own forecast). Gearing stands at 35.7% as at 31 Mar 2019.

Switch from ART to Keppel DC REIT, which is more fairly valued

Given stretched valuations as at 24 Jun’s close, we believe investors in ART may find an alternative in Keppel DC REIT (KDCREIT). Like ART, KDCREIT also boasts a quality portfolio of assets and substantial geographical diversification. In addition, we like KDCREIT for its long WALE of 8.0 years and believe that the data centre sector will be more resilient, relative to the serviced residences sector – this is a plus, should the trade war uncertainties persist past President Trump and President Xi’s meeting at G20.

KDCREIT is currently trading at a 4.88% blended forward dividend yield according to Bloomberg consensus, which we believe is an undemanding valuation relative to its risk-profile. We maintain HOLD on ART with an unchanged value of S$1.25.

Source: OCBC Research - 25 Jun 2019

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Labels: Ascott Reit

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