CapitaLand Ascott Trust 'top pick' of some analysts following 1HFY2023 results, DPS up 19% y-o-y

By Jovi Ho

/ The Edge Singapore |

July 31, 2023 4:19 PM SGT

Standard at Columbia serves over 35,000 students from the nearby University of South Carolina, the largest university in the state. Photo: CLAS

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Analysts are positive on CapitaLand Ascott Trust (CLAS) following the release of its results for 1HFY2023 ended June last week, citing portfolio optimism amid a tourism recovery.

CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee maintain “add” on CLAS in a July 28 note with an unchanged target price of $1.27, which represents a 15.5% upside. “CLAS is our top pick in the sector as its diversified and balanced portfolio provides both stability and upside exposure to the hospitality sector as well as portfolio reconstitution opportunities.”

CLAS’s 2QFY2023 ended June revenue per available unit (RevPAU) was at 98% of pre-pandemic, or 2QFY2019, levels when expressed in local currency terms.

2QFY2023 and 1HFY2023 RevPAU climbed 20% and 44% y-o-y to $149 and $138 respectively, with 2QFY2023 RevPAU reaching 98% of pre-Covid-19 pro-forma RevPAU, while 1HFY2023 portfolio occupancy stood at 75%.

On a same-store basis, six out of CLAS’s eight key markets were at or above pre-Covid-19 levels, note Ong and Lock.

CLAS’s 1HFY2023 revenue and net property income (NPI) rose 30% and 31% y-o-y to $346.9 million and $154.4 million respectively, mainly due to improvement in operating performance of its properties and the acquisition of 14 longer-stay assets in FY2022 and 2QFY2023.

Excluding the distribution of one-off realised exchange gains, distribution per stapled security (DPS) increased 19% y-o-y to 2.78 cents.

In addition, the higher interest rate and negative yield spread environment has caused many S-REITs to switch gears to prioritising organic growth through asset enhancement initiatives (AEIs) and putting acquisition ambitions on the backburner, write the CGS-CIMB analysts.

However, CLAS’s scale and diversification allows it to pursue asset and portfolio optimisation strategies, such as divestments, forward purchase acquisitions and redevelopment opportunities.

At the results briefing on July 28, CLAS announced that it has entered into a sale and purchase agreement to divest four properties in France for EUR44.4 million ($63.4 million). The sale price is 63% above book value, translating to an exit yield of some 4% and unlocking net gains of EUR0.2 million.

Management expects the sale to be completed in 4QFY2023.

CLAS still has $300 million in divestment gains which have yet to be deployed. It is also undertaking AEIs at five properties from 1Q2023 to 2Q2024, and redeveloping Somerset Liang Court, which is slated for completion in 2H2025.

Benefits from reopening ‘decelerating’

Meanwhile, Maybank Securities analyst Krishna Guha says the brokerage hosted CLAS’s management for lunch with a select group of investors. “Questions included the sustainability of RevPAU growth, cost pressures and investment outlook. Management said room rates are well above pre-pandemic levels in most markets, and forward bookings for 2HFY2023 are robust.”

Guha maintains “buy” on CLAS with an unchanged target price of $1.20.

CLAS’s RevPAU has more upside as occupancy scales to prior peaks, although the key is restoration of flight capacities, writes Guha in a July 30 note. “Further, corporate demand is resilient with changing corporate mix. Cost pressures are mitigated by lower manpower requirements for assets offering long-stay and limited services. As such, operating jaws remain positive. Management is interested in value-add opportunities in prime locations or brownfield projects at attractive pricing.”

According to Guha, CLAS’s management said assets are available in prime locations. These may be due to maturity of private funds, change of business line of current owners and asset repositioning requirements. Comments by management suggest market depth is an attractive feature of the US market.

While demand for Australian student accommodation is strong, pricing is very tight and the market is not as deep as in the US, he adds. “[CLAS’s] management reiterated its target of 25%-30% of assets being in the long-stay category. That said, management is open to opportunities in other hospitality categories opportunistically.”

Guha trims his FY2023/2024 DPS by 3% and 1% respectively, after factoring in contributions from new developments and acquisition of two rental housing assets in Japan, but offset by lower margins and higher borrowing cost.

The benefits from reopening are decelerating, in his view, unless recovery in China outbound tourism gathers pace. “That said, a healthy pipeline of events, full-year contribution from prior acquisitions and completion of AEI at Riverside Hotel Robertson Quay [in Singapore], and development of Standard at Columbia, should result in DPS growth.”

Risks include slower recovery of Chinese tourist arrivals and flight capacity, lower margins and higher interest rates, he adds.

‘Leave the party poppers to the end’

DBS Group Research, meanwhile, appears more cautious, positing a U-shaped recovery instead of a V-shaped one.

“We see a myriad of factors to give a boost to Singapore’s tourism market come 2HFY2023,” note DBS’s analysts on July 28. “While China’s recovery runway has been in question the past couple of months, recent data point that China outbound travel is happening, albeit missing investor’s expectations of a V-shaped recovery.”

Top China outbound markets of Hong Kong and Macau have recovered past the 60% mark in the latest month data set from June. Singapore stands optimistically within the Asia-Pacific (APAC) cluster, they add, and is “well-positioned” for the U-shaped recovery.

“Nonetheless, we note that upcoming international spotlights will be on Singapore’s Formula 1 weekend and the start of concerts to give a boost on the MICE front, giving much promise to a seasonally higher 2H2023,” they note. MICE refers to meetings, incentives, conferences and exhibitions.

Hence, DBS stays “buy” on CLAS with a target price of $1.30, the highest among the three brokerages featured.

Singapore assets continue to outperform peers within the APAC market, with numbers more apparent in CLAS’s management contract hotels, such as Citadines Mount Sophia, which are commanding rents at 20% above 2QFY2019 levels.

DBS’s analysts see further value extraction from the local market as CLAS looks to unlock further variable rental upside from the conversion of Ascott Orchard from a master lease at end-2022.

CLAS still has an additional 200 rooms following the Liang Court redevelopment to add to the portfolio come FY2025, “an exciting development line-up for the Singapore market”, they add.

As at 11.59am, units in CapitaLand Ascott Trust are trading flat at $1.10.

This article first appeared on The Edge Singapore.

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