Better geared to maximise portfolio winners
- FY21 DPU of 0.355 UScts missed our estimates; gearing level falls back to safe zone below 45%
- Non-core hotel assets in portfolio added to divestment radar
- Slower corporate travel priced into estimates; cut FY22F/FY23F estimates by 4%/5%
- Maintain BUY with lower TP of US$0.70; forward yields of 9.4% on last close price
Investment Thesis
Maintain BUY with lower TP of US$0.70, implying 40% upside and an attractive FY22F yield of 9.4%. We cut our estimates slightly as the spike in Omicron cases has resulted in a more cautionary pace in the recovery trajectory for higher yielding corporate demand. With the worst over, conditions are beginning to look ripe for a pick up – high vaccination rates, lifting of restrictions and increased global and domestic travel confidence, kicking off a positive momentum.
A turn-around in gearing as valuations play catch up. With travel demand turning up, we believe that an improvement in cashflows in FY22 will continue to support a re-rating in portfolio valuations, which are currently c.8% below FY19 levels. This should suffice in bringing gearing down to the low c.40% level from the current 44.3% in the medium term.
Portfolio rejuvenation has also been earmarked as a catalyst going forward, with non-core assets added to the divestment radar. This will comprise of ARAHT’s assets within structurally weaker markets, such as the Mid-West markets that are faced with population decline. Capital could be recycled to pare down debt or go towards higher yielding acquisitions, specifically Marriott or Hilton branded assets.
Valuation:
Our DCF-derived TP of US$0.70 is based on a WACC of 7.52% and a terminal growth rate of 2.25%.
Where we differ:
We are slightly more conservative on the recovery of corporate travel demand.
Key Risks to Our View:
Delay in return of corporate travel and resurgence of the COVID-19 pandemic from the new Omicron virus strain.