Ascott Residence Trust: Initiating Coverage by Kim Eng

Previous Day Closing price: $0.455
Recommendation: BUY
Target price: $0.77

We initiate coverage on ART with a BUY recommendation at a target price of $0.77. Its projected yield of 16.1% and 13.7%, and 0.31x P/NAV represent a chance to buy the premium Ascott brand at a bargain. ART owns and operates 38 well-located serviced residences in gateway cities of both emerging and stable markets.

Sponsor, The Ascott Group, is the serviced residence arm of Capitaland Ltd. It owns and operates 18,000 serviced residences outside of the US, with another 6000 units under development in Asia Pacific. These represent a strong pipeline of units that could be included in ART’s portfolio in the future.

ART’s gearing of 38.3% is well within the regulatory gearing limit. The bulk of its S$111m in bank loans maturing in 2009 is due only in Dec-09. We expect management to be able to refinance or secure fresh loans. ART faces no major refinancing need until 2011. Its low borrowing costs, averaging 3.5%, was achieved by good interest rate management.

Our target price is derived based on the dividend discount model (DDM) at a 9.7% cost of equity and 1% terminal growth rate. The key risk is a greater-than-expected decline in REVPAU in major operating markets. We are estimating a gentler decline in its FY09F DPU due to rental support from the long-stay segment. ART’s discount compared to its closest peer CDLHT is unjustified. We initiate coverage on ART with a BUY.

Source: Kim Eng, 11 Feb 2009