Maintaining faith in large domestic travel markets

  • Maiden acquisitions within the student accommodation space a testament that ART is en route to grow its longer-stay lodging assets exposure to 15-20% 
  • C.73% exposure in large domestic travel market to be relatively more demand-shielded from everchanging stance on border opening globally
  • Compelling entry at 0.9x P/NAV and 5.6% forward FY22 yields 
  • Maintain BUY with higher TP of S$1.30

Investment Thesis

Compelling value. Ascott Residence Trust (ART) currently trades below book at 0.9x P/NAV and on attractive 5.6% forward FY22 yields. We estimate a 43% y-o-y growth in DPU and on more resilient income stream from longer-stay lodging assets.  

Ramp-up of resilient longer-stay lodging asset income stream. Softer trajectory to normalisation for travel resumption and hotel sector from an islandwide RevPAR at c.50% of 2019 levels for full-year 2021. With border reopening delayed from the Omicron variant development, ART’s c.73% exposure to large domestic travel markets will continue to serve as an earnings buffer as domestic lodging demand will still be the most stable income stream for now. Moreover, maiden acquisitions within the student accommodation space and longer-lodging asset segment have fuelled inorganic growth of ART’s stable income contributions this year, en-route to ART’s long-term target of a 15-20% portfolio exposure in this space. 

Asset recycling to drive earnings and NAV upside. Healthy 35% gearing level and S$2bn debt headroom could mean that long-awaited acquisition of sponsor’s S$1.0bn US multi-family portfolio may be considered in 2022.

Valuation:

Our DCF-backed target price is raised to S$1.30 as we roll forward to FY22F earnings (to c.70% of normalised levels) on softer earnings recovery trajectory and S$300m acquisition assumption for FY22. 

Where we differ:

We believe large domestic travel markets continue to be well-sheltered from the faltering developments on border reopening.

Key Risks to Our View:

Omicron development to cause a longer-than-expected delay to global border reopening.