Friday, September 27, 2013

Ascott Residence Trust: Eurozone recovery and positive FX movements (OCBC)

Ascott Residence Trust:
Fair value S$1.37
add: 12m dividend forecast S$0.089
versus: Current price S$1.230

Eurozone recovery and positive FX movements
• Eurozone is improving
• FX directions should help ART
• Upgrade to BUY

Gradual recovery in the Eurozone should progressively translate into better leasing prospects for ART's European serviced residences. During the 2Q13 analyst briefing, management expressed that it believed that the whole portfolio's RevPAU for 2H13 will be flat or slightly higher than 1H13, assuming that exchange rates stay constant for the rest of the year.
Assuming flat RevPAU/rental income in local currency terms on a HoH basis for 2H13, we note that the overall exchange rate movements for 2H13 so far could actually increase ART’s gross profit by ~1.0% HoH, chiefly due to improvements in EUR and GBP versus the SGD. Going forward, ART's geographically diversified portfolio in this volatile environment will provide some resilience to negative FX movements. We maintain our FV of S$1.37 and upgrade ART from Hold to BUY as FY14 yield is attractive at 7.6% based on yesterday’s closing price.

Eurozone's weak recovery
Business activity in the Eurozone rose to a 27-month high, according to closely-watched data from London-based Markit Economics released yesterday (23 Sep). Germany led the region with good new business and employment gains. Various economic data is pointing towards weak recovery in the Eurozone. Gradually this should translate into better leasing prospects for ART's European serviced residences.

2Q13 in line with street
To recap, ART reported 2Q13 results that were in line with the street. Revenue fell 2% YoY to S$77.4m due to the divestments and lower contribution from existing properties. RevPAU contracted 9% YoY to S$142 and this was due mainly to the divestment of the Cairnhill property and weaker performance from China and Japan. Gross profit dropped 4% YoY to S$41.0m. However, unitholders’ distribution grew 14% YoY to S$30.9m (including a reversal of over-provision of prior years’ tax expense of S$2.7m), which led DPU up 3% YoY to 2.45 S cents. Excluding the placement units issued in 1Q13, DPU for 2Q 2013 would be 2.70 cents.

Foreign currencies to help gross profit
During the 2Q13 analyst briefing, management expressed that it believed that the whole portfolio's RevPAU for 2H13 will be flat or slightly higher than 1H13, assuming that exchange rates stay constant for the rest of the year. We analyzed movements in the average spot exchange rates for the various currencies in which ART receives its revenue in. Assuming flat RevPAU/rental income in local currency terms on a HoH basis for 2H13, the overall exchange rate movements for 2H13 so far could actually increase ART’s gross profit by ~1.0% HoH, chiefly due to improvements in EUR and GBP versus the SGD. Assuming no change in the asset values in local currency terms, we estimate a ~0.8% increase in portfolio value. Going forward, ART's geographically diversified portfolio in this volatile environment will provide some resilience to negative FX movements.

Upgrade to BUY
Since the unit price of ART has fallen 13.4% since we downgraded the REIT on 24 Jan, we believe that ART is undervalued at current levels, with an attractive yield of 7.6% for FY14E. We maintain our FV of S$1.37 and upgrade ART from Hold to BUY.


Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 24/09/13

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