Thursday, November 7, 2013

Ascott Residence Trust : Rights to acquire (CIMB)

Ascott Residence Trust
Current S$1.29
Target S$1.15
Rights to acquire

 ART has proposed a 1-for-5 rights issue to raise proceeds of up to S$253.7m. The funds will be used to improve financial flexibility and enhance ability to pursue potential acquisitions. At 22.5% discount to its last traded price (0.72x P/BV), we view this negatively.

We reduce our FY14-15 DPU by 12% and 13%to factor in an enlarged share base and reduced interest costs. Our DDM-based target price (at discounted rate of 8.6%) drops 12.2% to S$1.15. We downgrade ART to Underperform from Neutral and view yield destructive acquisition as de-rating catalyst.

What Happened
ART will issue renounceable underwritten 1-for-5 rights units to raise up to S$253.7m. The rights issue will be priced at S$1 each, a 22.5% discount to the last closing price (S$1.29) and 19.5%discountto the theoretical ex-rights price (S$1.24).  The Ascott Limited owns approximately 45% of issued units in ART and has provided an irrevocable undertaking for the rights issue. The rationale of the right issue is to increase ART’s debt headroom and enhance its ability to pursue potential acquisitions.

What We Think
The rights issue is priced at 28% discount to its latest NAV of S$1.38, fairly steep in our view. While asset leverage will reduce from 41% to 36% post the rights issue, we expect it to be temporary given the likely acquisitions.

We think the potential acquisition is unlikely to be yield accretive for shareholders. ART’s effective borrowing rate currently stands at 3.2% and we estimate its cost of equity to be at 8.6%. ART has madeacquisitionsaveragingc.S$325mannuallyinthe past two years, with EBITDA yield of 4-7%. We believe it will be difficult to find yield accretive assets given cap rates of 5-6% observed in ART’s recent acquisitions. ART previously engaged in sizeable acquisitions within 6 months of capital raising or divestments, and we expect similar timeframe this time round.

What You Should Do
We downgrade ART to Underperform from Neutral. ART’s 2014 forward dividend yield of 6.3% is below peers at 7.0%, and we expect potential yield destruction from acquisitions.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 05/11/13

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