DBS Group Research 2015-07-16: Ascendas Hospitality Trust - NEGATIVES PRICED IN. Reiterate BUY.

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NEGATIVES PRICED IN 

• Currency headwinds largely priced in. 
• We reiterate our BUY recommendation and S$0.76 TP. 
• We believe the recent drag from a weak AUD and JPY has largely been priced in, having imputed AUD/SGD (1.0) and SGD/JPY (92) rates which are already at or below the current spot rates. 
• Moreover, with the unwinding of cross-currency swaps (CCS) last year, the REIT will no longer be hampered by additional CCS costs (c.12% of FY15 distributable income). 

Australian hotels to sustain performance going forward. 

• We believe the Australian portfolio (58% of FY15 NPI), especially the Sydney and Melbourne hotels, will underpin ASCHT’s growth outlook. This is due to increasing tourist arrivals into Australia and modest supply of new hotels in Sydney and Melbourne. 
• We have assumed a 3% increase in FY16F Australian RevPAR compared to 4.2% and 4.5% growth for the Sydney and Melbourne markets respectively in CY14. 

Additional boost from Japan. 

• The projected 18% jump in FY16F DPU is also due to the expected improvement in ASCHT’s Japanese portfolio which should benefit from the growth in international visitors on the back of the weaker JPY. This can be seen by the doubling of RevPAR at Oakwood Apartments in 4Q15. 
• Furthermore, the agreement signed with Sunroute to be the new operator of Osaka Namba Washington Hotel should result in a 13% uplift in annual fixed rents for the property. 

Valuation: 

• Rebound in DPU. We believe a recovery in DPU this year after a weak FY15 will boost confidence in the REIT and act as catalyst to close the 10% and 7% discounts to our DCF-based TP of S$0.76 and book value per share of S$0.74 respectively. 
• Moreover, ASCHT offers investors an 8.6% yield which is the highest in the hospitality space. 

Key Risks to Our View: 

• Significant drop in AUD/JPY and demand/supply imbalance. 
• Should the AUD/JPY drop significantly from current levels and there is excess supply in ASCHT’s respective markets, there will be downside risks to our DPU estimates and ASCHT will continue to trade at a discount to book value. 

Price Target : S$0.76 (10% upside and 8.6% yield)

Potential Catalyst: Recovery of earnings and further acquisitions 

Where we differ: DBS is the sole sell-side firm covering the REIT 

(Mervin SONG CFA, Derek TAN)

Source: http://www.dbsvickers.com/