• ART's 2Q18 DPU of 1.84 Scts was in line at 26.8% of our full-year estimate.
• The stronger 2Q revenue was mainly driven by acquisitions.
• Acquisitions offset the weaker organic performance due to keen competition in
• Australia, Japan and Vietnam as well as the weaker forex against S$.
• Maintain HOLD. Lacking re-rating catalysts (factored in one acquisition in FY19), but dividends should cap downside risk.

2Q18 Results Summary

Ascott Residence Trust's 2Q18 DPU of 1.84 Scts (flat y-o-y), came in at 26.8% of our full-year forecast. 

Adjusting for the realised FX gain of S$11.9m, 2Q18 DPU would have registered 13% y-o-y improvement, mainly due to four acquisitions in 2017 - Ascott Orchard Singapore, two properties in Germany, and DoubleTree by Hilton Hotel New York. This was partially offset by divestments (in Japan and China) and organic weakness.

Segment Breakdown

Gross profits from master leases (32% of the group’s gross profits) grew 28% y-o-y, mainly due to inorganic contribution from Ascott Orchard Singapore acquired in Oct 2017. The acquisition boosted 2Q18 gross profit in Singapore by 188% y-o-y to S$4.6m. Excluding the effect of acquisition, same-store gross profit in Singapore would have been 13% y-o-y. 

Gross profit from management contracts with minimum guaranteed income (14% of total gross profits) rose 6% y-o-y; that of other management contracts (54% of total gross profit) declined 7% y-o-y due to weaker forex vs. S$, competition and ongoing refurbishments.

Unveiling the Organic Weakness of Management Contracts

In local currency terms, despite the stronger revenue, gross profits from China declined 5% y-o-y due to property tax refund received and reversal of prior year’s depreciation expense in 2Q17.

Indonesia revenue was down 3% y-o-y due to ongoing renovation of Somerset Grand Citra. Japan revenue was softer (-JPY1.5m) due to keen competition in Kyoto. Philippines revenue (-5% y-o-y) was affected by Ascott Makati's renovation. Vietnam revenue (-8% y-o-y) was impacted by fewer project groups in Hanoi.

Continuously Looking for Acquisitions

End-2Q18 gearing was lower y-o-y at 35.7%. All-in borrowing costs stayed at 2.3% p.a. 84% of the total debts are on fixed rate term, with 9% of total borrowings to be refinanced in 2018. Assuming 40% cap on gearing, we estimate that ART has S$350m available debt headroom. 

There are 20 right of first refusal (ROFR) properties in the pipeline and management alluded that it is looking closely at Vietnam, Japan, India, Europe, France and London. 

Ascott Ochard’s underlying performance has been good, with YTD revenue rising 50% y-o-y. The trust expects the asset to achieve variable rent by next year.

Strategies Going Forward

The trust is doing more marketing to target the leisure segment in Vietnam for diversification as 90% of its customers there are corporates. Its sponsor is also revamping its IT system, particularly the areas of reservation, membership loyalty and business intelligence. ART also emphasises the importance of constant refurbishment as yield usually improves within six months post renovation.

Hold Maintained

We keep our estimates, HOLD call, and DDM-based Target Price of S$1.16 given the limited re-rating catalysts (factored in one acquisition in FY19) while downside risk should be capped by FY18-20F dividend yield of 6-6.5%. 

Upside risks could come from pick-up in core markets and higher-than-expected ROI from acquisition in FY19 while downside risk could come from higher interest rate and weaker-than-expected forex against S$.

Source: CGS-CIMB Research - 24 Jul 2018