Broker's take: KGI downgrades ARA H-Trust to 'neutral' on slower recovery

KGI Securities has downgraded ARA US Hospitality Trust (ARA H-Trust) to "neutral" with a lowered target price of US$0.40 from US$0.67.

The stapled group's results for the first half of 2020 was below expectations, KGI said in a research note on Friday. It has revised its forecasts to reflect a slower recovery rate for the rest of fiscal 2020 and 2021.

As at 3.54pm, stapled securities of ARA H-Trust were trading up 1.4 per cent or 0.5 US cent to 35.5 cents.

When it comes to the revised fair value of US$0.40, KGI analyst Amirah Yusoff said the research team factored in a higher cost of equity given the risks associated with the pandemic in the US. This is especially since there has still been "no clear or solid plan by the central government" to contain the virus, she said.

KGI has also taken into consideration the risks of a rights issue. It prefers to "stay conservative" until valuations are conducted, or at least until more indicative hotel prices are released in the coming months.

Although demand may not recover as quickly in 2020, KGI expects pent-up demand for travel for leisure and business to rebound once the spread of the Covid-19 virus is under control in the second half of fiscal 2021.

Its outlook for the second half of 2020 "remains hazy", but long-term growth is intact, according to the research note.

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