The AEIs and acquisitions that were completed in 2013 should contribute positively to FY14 earnings. Forex concern was slightly mitigated but remains a long-term issue due to ART’s wide geographical reach. ART’s current valuation of 0.94x FY14 P/BV is reasonable.
Our DDM-based target price (at discount rate of 8.5%) remains unchanged at S$1.15. Under our new rating structure, our rating changes from Neutral to Hold.
Benefits from AEIs and acquisitions in 2014
Approximately S$24.5m in asset enhancement initiatives (AEIs) will be completed by end-2013, which will lift the average daily rates (ADR) for the selected properties by 20-35%. The acquisition of three service residences in China and 11 rental housing properties in Japan in 2013 will make a full-year earnings contribution in 2014. We have factored in c.S$20m of AEIs in FY14-16.
Forex concern slightly mitigated
In Sep 2013, management entered into foreign currency forward contracts to hedge c.70% of its 3QFY13 distribution that was derived in € and £. The cost and contracted rate were not disclosed. Management highlighted that it may carry out foreign currency hedging on a 1-year rolling basis moving forward. Its € and £-denominated earnings comprised 47% of gross profit in Dec 2012 to Sep 2013, and were structured as either master leases or management contracts with minimum guaranteed income. While hedging foreign currency on a rolling basis does improve visibility on the impact of forex movements in the short term, there will still be a
long-term impact, albeit on a lagged basis.
With its improved gearing of 34.3% and debt headroom of S$313m-640m (at 40-45% gearing) post-rights issue, ART is in a better position to pursue potential acquisitions and asset enhancement initiatives. The potential acquisitions in the pipeline are located in China, Japan, Malaysia and Australia. The potential acquisitions are expected to be completed by 1H14, which will likely lead to a higher DPU. We have yet to factor the potential acquisitions into our model, based on lack of clarity.
Publish date: 04/12/13