• ART’s 2Q18 results came in below expectations, mainly due to the absence of one-off forex gains and an enlarged unit base. 
• Maintain HOLD and target price of S$1.18. 
• Maintain OVERWEIGHT on the sector.

Ascott Residence Trust (SGX:A68U / Rating: HOLD / Target Price: S$1.18)

Ascott Residence Trust (ART) posted 2Q18 DPU of 1.84S cents, flat y-o-y and up 36% q-o-q. Distributable income declined 15% y-o-y, mainly due to the one-off realised forex gains of S$11.9m in 2Q17. Excluding that, distribution would have increased 14% y-o-y.

2Q18 revenue and gross profit were up 6% y-o-y and 7% y-o-y respectively.Revenue growth was attributed to contributions from properties acquired in 2017 (S$10.4m from the 2017 acquisitions of Ascott Orchard Singapore, Citadines City Centre Franfurt, Citadines Michel Hamburg and Double Tree Hilton New York - Times Square South).The results came in below expectations, with 1H18 DPU representing 43% of the full year forecast.

Overall revenue per available unit rose 6% yoy to S$155.

Gross profit of S$63.1m in 2Q18 comprised serviced residences on master leases (32%), management contracts with minimum guaranteed income (14%) and management contracts (54%).

Belgium, China and the UK are among the best performing markets in 2Q18.

RevPAU (local currency terms) grew 15% y-o-y (due to demand recovering post-2016 terror attacks), 15% y-o-y (due to divestment of Citadines Gaoxin Xi’an and Citadines Biyun Shanghai which had lower RevPAU), 6% y-o-y (due to higher leisure demand and higher contributions from refurbished apartments at Citadines Barbican London) respectively.

The weaker markets which saw RevPAU declines included Malaysia (-17%), Vietnam (-11%) and Spain (-10%) in local currency terms. Malaysia properties saw lower occupancy due to keen competition, while Vietnam properties were hit by fewer project groups in Hanoi. Spain also saw weaker leisure demand, arising from the political instability in Catalonia.

Gearing declined marginally q-o-q to 35.7% (1Q18: 36.1%).

ART still has available debt headroom of S$857m (before reaching the 45% limit set by MAS). Around 84% of the total borrowings are also on fixed interest rates, which would hedge against the potential rise in interest rates.

However, RevPAU was weak across markets, like Malaysia (-17%) which saw lower occupancy due to competition, Vietnam (-11%) due to fewer project groups in Hanoi, and Spain (-10%) due to weaker leisure demand from the political instability in Catalonia.

Maintain HOLD with a lower target price of S$1.18.

This is to reflect a 25bp rise in our risk-free rate assumption to 2.75%. Our valuation is based on DDM (required rate of return: 8.0%, terminal growth: 2.3%). Entry price: S$1.07.

Source: UOB Kay Hian Research - 25 Jul 2018