UOB Kay Hian keeps ‘buy’ on Capitaland Ascott Trust with lowered target price

UOB Kay Hian is maintaining his “buy” call on Capitaland Ascott Trust, but at a lowered target price.

UOB Kay Hian analyst Jonathan Koh is maintaining his “buy” call on Capitaland Ascott Trust (CLAS) HMN after the trust proposed to acquire three lodging assets in the UK, Ireland and Indonesia.

On Aug 2, CLAS signed a memorandum of understanding (MOU) with its sponsor, The Ascott Limited, to acquire the three assets, which are the 230-unit The Cavendish London, the 136-unit Temple Bar Hotel in Dublin and the 185-unit Ascott Kuningan in Jakarta. The consideration for the acquisition stood at an agreed price of $530.8 million.

All three assets are located in prime locations within their capital cities, with The Cavendish, the Temple Bar Hotel and the Ascott Kuningan providing an ebitda yield of 4.1%, 7.6% and 6.7% respectively.

While the acquisition will be accretive to CLAS’s distribution per unit (DPU) by 1.8% on a pro forma basis, Koh has trimmed his FY2024 DPU forecast by 3% due to the depreciating foreign currencies against the Singdollar. As at Koh’s report dated Aug 29, the Australian dollar (AUD) was down by 6.1% y-o-y; the Chinese renminbi (RMB) was down by 10.1% y-o-y and the Japanese yen (JPY) was down by 8.5% y-o-y.

AEIs to benefit CLAS

CLAS’s intention to conduct asset enhancement initiatives (AEIs) for The Cavendish and Novotel Sydney Central, will also impact the trust positively, notes Koh.

The Cavendish will be renovated from 4QFY2024 to 4QFY2025 and rebranded under The Crest Collection brand, a luxury brand managed by Ascott. Its average daily rate (ADR) is expected to increase from GBP250 ($429) to above GBP500 given The Cavendish’s positioning as an entry-level luxury hotel.

The property’s valuation is also expected to increase by GBP101 million to GBP316 million after renovation and stabilisation in FY2027. The ebitda yield on total capitalised cost is therefore expected to improve by 2.4 percentage points (ppt) to 6.5% at stabilisation.

The 255-room Novotel Sydney Central will be undergoing an AEI from 4QFY2024 to 1QFY2026, whilst the 192-unit Citadines Holborn-Covent Garden London will be undergoing an AEI from 3Q2023 to 1QFY2024.

The number of rooms at Novotel Sydney Central will increase by 72 or 28% with an eight-storey extension above the car park podium. Development approval for the additional gross floor area (GFA) of 2,400 square metres (sqm) was already obtained. The yield on AEI cost is 11.3%.

Valuation is expected to increase by A$173.3 million ($151.7 million) to A$339.8 million in FY2028. The yield on AEI cost for the Citadines Holborn-Covent Garden London is 10.6%, whilst valuation is expected to increase by GBP29.5 million to GBP 125.3 million in FY2025.

Meanwhile, renovation commenced for the 336-room Riverside Hotel Robertson Quay Hotel (RHRQ) in Singapore on March, which is aimed for completion in 4QFY2023. Following the renovation, the RHRQ will be rebranded as The Robertson House, also under the The Crest Collection brand.

A new 192-unit Somerset serviced residence at Clarke Quay is also under construction which is on track for completion in 2HFY2025.

RevPAU to trend higher in 3QFY2023

CLAS’s revenue per available room (RevPAU) is expected to trend higher in the 3QFY2023 ending Sept 31 as 2HFY2023 is typically a seasonally stronger period.

In his report, Koh points out that the growth will be supported by recently-opened markets such as Japan and China, as well as large-scale events like the FIFA Women’s World Cup and the F1 Singapore Grand Prix. International arrivals are also projected to further recover to 80% to 95% of pre-pandemic levels by the end of the year. CLAS’s management also expects overall international travel to pick up the pace as flight capacities increase, says the analyst.

In the 2QFY2023, CLAS’s RevPAU grew by 20% y-o-y to $149, which is 98% of CLAS’s pre-pandemic levels. The RevPAU for key markets in Australia, Japan, Singapore, the UK and US was above pre-pandemic levels based on same-store basis, whilst China and Vietnam outperformed with a RevPAU growth of 78% and 83% y-o-y respectively.

CLAS’s portfolio occupancy, which stood at around 75% as at June 30, has “room to improve”, according to Koh.

To the analyst, catalysts to CLAS’s unit price include the recovery of international arrivals and the continued recovery in corporate demand as airlines increase flight capacities, as well as yield-accretive acquisitions for student accommodation and rental housing.

As at 3.35pm, shares in CLAS are trading at 0.5 cents lower or 0.51% down at 97 cents

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