Ascott Residence Trust
Valuations reasonable, awaiting acquisition
▊ ART’s share price has fallen c.9% since the announcement of its 1-for-5 rights issue and our subsequent downgrade. We think that most of the negatives have been priced in. The stock trades at 0.93x FY14 P/BV, in line with the 0.94x average of its peers and reasonable in our view. Our DDM-based target price (at discount rate of 8.5%) is unchanged at S$1.15. We upgrade ART to Neutral from Underperform, as we believe negatives from its rights issue have been mostly priced in. We also see potential acquisitions as re-rating catalysts.
ART’s share price has declined c.9% since the announcement of its 1-for-5 rights issue (at 19.5% discount to the theoretical ex-rights price of S$1.24 and 23.7% to proforma net asset value of S$1.31) and our subsequent downgrade.
What We Think
At 0.93x FY14 P/BV and 6.9% FY14 dividend yield, we think that ART’s valuations are reasonable and that the rights issue negatives have been priced in. Its improved net gearing of 34.3% and debt headroom of S$313m-640m (at 40-45% gearing) put ART in a better position to pursue potential acquisitions and asset enhancement initiatives. The potential acquisitions could be located in China, Japan, Malaysia or Australia, which are likely to have varying acquisition yields and withholding taxes. The acquisitions, expected to be announced by 1H14, could potentially lift its DPU. We have yet to factor them into our model due to a lack of clarity on asset and acquisition yields.
What You Should Do
Investors should remain Neutral as ART’s valuations are reasonable at 0.93x FY14 P/BV and 6.9% FY14 dividend yield. Its peers are trading at an average of 7.3% FY14 dividend yield.
Publish date: 27/11/13