Ascott Residence Trust

CIMB Research, Nov 27

OUR DDM (dividend discount model) based target price (at discount rate of 8.5 per cent) is unchanged at S$1.15.

We upgrade Ascott Residence Trust (ART) to Neutral from Underperform, as we believe negatives from its rights issue have mostly been priced in. We also see potential acquisitions as re-rating catalysts.

ART's share price has declined c.9 per cent since the announcement of its 1-for-5 rights issue (at 19.5 per cent discount to the theoretical ex-rights price of S$1.24 and 23.7 per cent to proforma net asset value of S$1.31) and our subsequent downgrade.

At 0.93 times FY14 P/BV and 6.9 times FY14 dividend yield, we think that ART's valuations are reasonable and that the rights issue negatives have been priced in.

Its improved net gearing of 34.3 per cent and debt headroom of S$313-640 million (at 40-45 per cent gearing) put ART in a better position to pursue potential acquisitions and asset enhancement initiatives.

The potential acquisitions could be located in China, Japan, Malaysia or Australia, which are likely to have varying acquisition yields and withholding taxes.

The acquisitions, expected to be announced by H1-14, could potentially lift its distribution per unit (DPU).

We have yet to factor them into our model due to a lack of clarity on asset and acquisition yields.

Investors should remain Neutral as ART's valuations are reasonable at 0.93 times FY14 P/BV and 6.9 times FY14 dividend yield. Its peers are trading at an average of 7.3 times FY14 dividend yield.

NEUTRAL