• 4Q15 DPU down 4.2% YoY
• Portfolio RevPAU grew 17% YoY in 4Q15
• Cheap discount to NAV

4Q15 results within our expectations

Ascott Residence Trust (ART) reported its 4Q15 results which came in within our expectations. Revenue grew 25.5% YoY to S$119.2m, driven largely by additional contribution from acquisitions made in 3Q15 and 4Q14, coupled with a slightly better operating performance from existing properties. However, DPU decreased by 4.2% to 2.07 S cents. If we adjust for one-off items in 4Q14, ART’s adjusted DPU would instead have increased by 17.6% YoY. For FY15, revenue rose 17.9% to S$421.1m, while DPU fell 2.6% to 7.99 S cents. Both figures formed 99.1% of our full-year forecast.

Improvement in portfolio RevPAU

Encouragingly, ART’s portfolio RevPAU jumped 17% YoY to S$145 in 4Q15 due partly to recent acquisitions. Excluding these acquisitions, its RevPAU still increased 2% YoY as a result of stronger performance from its assets in China, Indonesia and Vietnam. On a full-year basis, ART’s FY15 RevPAU increased 4% to S$133. Looking ahead, management remains cautious on the near-term prospects of Singapore, given the upcoming new supply.

Nevertheless, it remains positive on growth in Tier-1 cities in China, which should help to offset weakness in the Tier-2 cities. Other countries which are expected to perform well include Japan and Vietnam, while Europe is seeing a slow recovery.

Maintain BUY, albeit with a lower fair value

We trim our FY16 DPU forecast by 2.9% on account of a slight 1.2% reduction in our revenue projection and a lower gross profit margin assumption in our model. We also switch our valuation methodology from a RNAV model to a dividend discount model (cost of equity assumption: 7.8%; terminal growth rate: 1.5%), which is the more commonly used valuation metric within our S-REITs coverage. This results in a dip in our fair value from S$1.44 to S$1.28. Nevertheless, we are reiterating our BUY rating on ART, as we believe valuations are attractive.

The stock is currently trading at 0.77x FY16F P/B, which is 1.8 standard deviations below its 5-year average of 0.89x. Prospective yield of 7.4% comes in at close to half a standard deviation above its 5-year mean of 7.2%.

Source: OCBC Research - 27 Jan 2016