Brokers’ take: Phillip Securities upgrades CapitaLand Ascott Trust to ‘buy’

PHILLIP Securities has upgraded its call on CapitaLand Ascott Trust : HMN 0% (Clas) to “buy” following the release of the real estate investment trust’s (Reit) Q3 business updates.

It has, however, cut its target price on the Reit to S$1.13 from S$1.24 after lowering its distribution per unit (DPU) projections for FY2022 to FY2024 by 5-7 per cent.

In a report issued Tuesday (Nov 1), the research house highlighted Clas as its top pick in the Reit sector despite the lower target price. 

According to analyst Darren Chan, the revised projections came on the back of foreign currency headwinds and an enlarged share base from Clas’ recent acquisitions. 

Phillip also increased its cost of equity projection to 8.34 per cent from 8.14 per cent on a higher risk-free rate assumption.

The research house nonetheless continued to like Clas for its potential to raise the proportion of its stable income to cushion the impact from recessionary uncertainties, considering the majority of its debt is hedged at a fixed rate. 

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“Clas remains our top pick in the Reit sector with its geographically diversified portfolio, range of lodging asset classes, stable income base which has proven its resilience through Covid-19, and a strong sponsor,” said Chan. 

Rising occupancy rates and forward bookings of Clas’ accommodations also indicate “pent-up sustained demand” that will help the Reit abate rising costs, in Chan’s view.

“In terms of capital management, Clas’ gearing of 35.8 per cent means a debt headroom of about S$2 billion, leaving room for it to reach its medium-term asset allocation of 25-30 per cent for longer-stay accommodation,” Chan added.

DBS Research also lowered its target price for Clas to S$1.30 from S$1.40 last Friday, while maintaining its “buy” call.

The lower target is based on higher interest rate assumptions and an adjusted risk-free rate of 3.5 per cent. DBS analysts noted that Clas currently trades about 0.8 times below book, and they estimated “attractive” yields above 6 per cent for FY2022 and FY2023.

The research team said Clas is on the cusp of a multi-year recovery trajectory and the Reit’s “green shoot markets” will lead the charge. 

CGS-CIMB has likewise maintained its “add” call on Clas in light of its strong recovery and diversified portfolio. 

Analyst Lock Mun Yee praised Clas’ sound financials in a report last Friday, with the trust continuing to perform within CGS-CIMB’s forecasts of 6 per cent and 6.9 per cent DPU yields for FY2022 and FY2023 respectively. 

“While the higher interest rate environment has led to pricing uncertainty and a slowdown in transactions, Clas stands ready to acquire should opportunities arise,” she said. 

Units of Clas were trading up 1 per cent or S$0.01 at S$0.97 as at 2 pm on Wednesday.