Ascott Residence Trust offers untapped potential

SOFTER corporate demand and an uncertain economic climate are plaguing the hospitality sector, but some analysts still spy promise in Ascott Residence Trust (ART).

Eight analysts have a "buy" call on the counter, while four have issued a "hold" call, according to Bloomberg data. The 12-month consensus target price stands at S$1.27, above Tuesday's closing price of S$1.145.

Factors underpinning the bullish outlook include ART's diversified portfolio, contributions from recent expansion efforts as well as its asset enhancement initiatives.

"Amid the volatility in the Singapore hospitality market, we believe ART's diversified portfolio with serviced residences and rental housing across 14 countries in the Asia-Pacific, Europe and the US, offers investors a more resilient distribution per unit (DPU) outlook," wrote DBS Group Research analyst Mervin Song, who has a target price of S$1.32 on ART.

In Q3 FY16, no single market accounted for more than 18 per cent of ART's gross profit. During the same quarter, 41 per cent of ART's gross profit came from master leases and management contracts with minimum guaranteed income, which helps with cash flow visibility.

By next year, ART's asset size will total S$5.3 billion (including Ascott Orchard Singapore), up from S$4.9 billion as at Sept 30 this year. This comes after it has been on an acquisition path over the last two years, making its maiden foray into Malaysia and the US. In addition, it has expanded its footprint in Australia, China and Japan.

Meanwhile, its management is still on the look-out for accretive acquisitions in gateway cities in Australia, Japan, Europe and the United States. It is said to be keen to grow its portfolio size further to S$6 billion.

Asset enhancement

In addition to its expanded portfolio, recent and ongoing asset enhancement efforts should also contribute to its performance in the coming years, analysts say.

Last week, ART released its results for the third quarter ended Sept 30, with DPU rising 14 per cent from a year ago to 2.35 Singapore cents, thanks to a one-off gain. Without this, core DPU would have been unchanged at 2.15 cents.

Unitholders' distribution grew 21 per cent to S$38.7 million, boosted by a realised exchange gain of S$3.3 million from the repayment of foreign currency bank loans due to the divestment proceeds from Fortune Garden Apartments.

ART's recent acquisitions also helped lift revenue by 9 per cent to S$123.9 million for the quarter and bolster revenue per available unit.

However, there was weakness in markets such as China, Japan and Singapore, thanks to different factors ranging from currency depreciation to weaker demand. This was offset by higher income from Australia and the US. Another bright spot is that the London market appears to have remained fairly stable after the Brexit vote.

Going forward, demand for serviced residences could remain soft, analysts warn, due to a slowing economy as well as turbulence in the oil and gas sector.

"Reports and statistics seem to point to a continued deterioration of corporate demand," said OCBC Investment analysts in a report on the hospitality sector dated Oct 14. "For serviced residences, we look at reported headquarter relocations and layoffs that could have and/or could still affect expat-housing demand."

OCBC analyst Andy Wong has maintained his "buy" rating and S$1.24 fair value estimate on ART since the Reit released its Q3 results.

Gearing is also an issue that was flagged, given that it stands at 41 per cent as at Sept 30. This may come down as ART is looking to divest lower-yielding properties, Mr Song noted.

But ultimately with a diversified portfolio and attractive yields of over 7 per cent, ART is still seen to offer unrealised potential for investors.