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Simons Trading Research

Author: simonsg   |   Latest post: Tue, 17 Sep 2019, 9:11 AM

 

Ascendas Hospitality Trust - Waiting to be Rediscovered

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  • Ascendas Hospitality Trust’s 2Q19 results in line; boosted by contributions from recent acquisitions and lower interest costs. 
  • Australia operations hazy in the near term given new supply. 
  • Strategic refurbishments to keep hotels competitive and attractive to guests. 
  • Potential upside from acquisitions. 

Buy Low, Sell High

  • We maintain our BUY call with a Target Price of S$0.98.
  • Ascendas Hospitality Trust’s (ASCHT) management has demonstrated the ability to buy low and sell high as seen by the sale of its Beijing hotels at more than twice the book value, exit yield of 3.6%, and redeploying the proceeds into properties with net property income (NPI) yield above 4.1%. However, this value add has not been recognised with ASCHT’s still trading 24% below our fair value.
  • Attractive yields of 7.3%-7.6% provides support to share price.

Where We Differ: (DBS Is the Sole Broker Covering the Stock) - Misunderstood Stock

  • Ascendas Hospitality Trust’s (ASCHT) has been ignored by many investors due to its small market cap and its large exposure outside Singapore.
  • We believe the stock offers compelling value, as its key markets of Australia (c.50% of FY18 NPI) and Japan (c.25%) are in a secular uptrend, thanks to the low penetration of international visitors. For example, a small country like Singapore attracts 16m visitors annually versus Japan and Australia with 24m and 8m, respectively.

Valuation

  • We maintain our DCF-based Target Price of S$0.98. With 31% total return (24% capital upside and 7.3% yield), we reiterate our BUY call.

Key Risks to Our View

  • Key risks to our positive views are large falls in the AUD/JPY and excess supply in ASCHT’s respective markets, resulting in downside risks to our DPU estimates.

What's New - Robust Results Despite Headwinds

2Q19 DPU of 1.42 Scts (+2.8% y-o-y) – IN LINE. 

  • Ascendas Hospitality Trust’s (ASCHT) 2Q19 gross revenue and NPI fell 11.9% and 7.5% y-o-y to S$52.7m and S$22.1m, respectively. This was mainly due to the ongoing challenges faced by the REIT’s Australia operations due to increasing supply competition, coupled with the weakness of the AUD vs SGD exchange rate. The full quarter’s contribution from the recent acquisition of a hotel in Seoul has helped to partially offset the weaker performance.
  • Distributable income increased 3.6% y-o-y, mainly on interest cost savings and partial distribution of proceeds from the divestment of the China portfolio, resulting in 2.8% y-o-y growth in DPU to 1.42 Scts.
  • Overall, 1H19 DPU of 2.73 Scts (+2.9% y-o-y) – based on a 93% payout of distributable income - formed 47% of our FY19F estimates.

Softness in Australia offset by improved rent structure anchors resilience ahead.

  • NPI fell 19.9% y-o-y to S$10.3m, partly dragged by the softer AUD which weakened by 7% y-o-y against the SGD. In Australia: RevPAR was down 4.7% y-o-y in 2Q19 as average daily rates (ADR) were lowered to defend market share, and as such, the occupancy rates for its hotels in Sydney remained strong at 90% while achieving mid-80% levels across its hotels in Melbourne and Brisbane.
  • Upcoming 2019 elections is a dampener on business travel but initiatives in place to increase competitiveness and drive performance, particularly in the leisure segment. In addition, the refurbishment of the café at Pullman and Mercure Brisbane are ongoing, and the proposed refurbishment of rooms in Novotel Sydney will commence in 2019.

Japan: Hampered by poor weather conditions, but otherwise resilient.

  • RevPar was down 5% y-o-y as the Japan market was dragged by the earthquake and typhoon in Osaka.
  • Notwithstanding disruptive weather conditions, NPI held relatively steady (-1.6% y-o-y) at S$5.9m in 2Q19.

Higher contributions from Korea and Singapore.

  • NPI from the Korea market more than doubled q-o-q to S$0.9m in 2Q19 on the first full quarter contributions from Splaisir Seoul Dongdaemum, which was acquired in May 2018. Whilst variable rents have yet to kick in, the hotel delivered strong underlying performance with RevPAR growth of 8.9% y-o-y.
  • Back home, Park Hotel Clarke Quay continued to ride on the recovery in the local hotel sector. RevPAR in Singapore improved 2.5% y-o-y, driving a 3.9% increase in NPI to S$3.4m
  • Enhanced rent structure improves earnings visibility. Following the divestment of the China portfolio, which was under a management contract, and initiation of a master lease contract for the newly acquired hotel in Seoul, the proportion of master lease vs management contract based income rose from 38% in 2Q18 to 50% in 2Q19.
  • Ahead of the bottoming out of the Australia market, we believe that the improved income visibility under the current balanced rent structure enhances stability, which bodes well for future distributions.

Source: DBS Research - 01 Nov 2018

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