• Ascott Residence Trust expects 1H20F DPU to decline 65-75% y-o-y.
• We cut FY20-22F DPU by 19-53% to factor in larger declines in RevPAU/RevPAR.
• Reiterate ADD, with a lower Target Price of S$1.06. The market appears to have priced in the potential downsides.

Ascott Residence Trust's 1H20F DPU Could Decline 65-75% Y-o-y

• According to The World Tourism Organisation (UNWTO), international arrivals declined 44% y-o-y in Jan-Apr, and plunged 97% y-o-y in Apr. For the full year 2020, UNWTO expects international tourist numbers to deteriorate 58-78% y-o-y.
• While Ascott Residence Trust (SGX:HMN)’s geographically diversified portfolio has, under usual business conditions, provided resilience to earnings, extensive global travel restrictions have impacted the occupancy at its assets. Ascott Residence Trust guided that it is expecting
  1. available income for distribution in 1H20 to decline 55-65% y-o-y,
  2. 1H20 DPU to drop 65-75% y-o-y, and
  3. total return in 1H20 to decline 80-90% y-o-y.
• Excluding the fair value gains of S$135m from the divestment of Ascott Raffles Place Singapore, Ascott Residence Trust guided for its total return in 1HFY20 to fall 55-65% y-o-y.
• Ascott Residence Trust will also conduct valuation of its assets on an annual basis instead of a half yearly basis starting this quarter. So any fair value changes on properties will only be recorded in its full-year results.

Relying on Domestic Demand as Borders Remain Largely Closed

• With the borders of most countries still closed to most foreigners, Ascott Residence Trust would have to rely mostly on domestic demand. Japan, Australia and the US which have experienced the resurgence of Covid-19 cases recently, are the top markets for Ascott Residence Trust, accounting for 45% of its asset under management (AUM) as at end-Jun 2020.
• Although 35 of Ascott Residence Trust's 87 leases are master leases, we understand that it may need to provide assistance to some of the master lessors which are not its sponsor;13 of the master lease are held by third-parties. Potential operating losses may also offset some of its master lease income.

Ascott Residence Trust's FY20-22F DPU Cut by 19-53%; Reiterate ADD

• We cut our Ascott Residence Trust's FY20-22F DPU by 19-53% to factor in larger decline in RevPAR/RevPAU (from 20-50% previously to 40-70%). We also removed capital distribution from our FY20-22 forecast. These reduce our DDM-based target price for Ascott Residence Trust, which is rolled over to FY21F, to S$1.06.
• Despite the weak outlook and cut in DPU, we reiterate out AD rating on Ascott Residence Trust as we believe the market has priced in the downside risks.
• The stock is trading at 0.78x P/BV, below 12-year mean of 0.9x. Based on our sensitivity analysis, a 5% pts decline in FY21F RevPAU from the current assumed RevPAR/RevPAU of 40-60%, will reduce our target price by 2-9% to S$0.98.
• Potential re-rating catalysts include capital distribution, better RevPAR/RevPAU, and earlier reopening of borders.
• Downside risks include prolonged border closures.

Source: CGS-CIMB Research - 20 Jul 2020