PhillipCapital is downgrading its call on CapitaLand Ascott Trust HMN (CLAS) to “accumulate” from “buy” with an unchanged target price of $1.04, as the research house rolls forward its forecast. CLAS also remains the research house’s top pick in the sector with its geographically diversified portfolio, wide range of lodging asset classes, stable income base which has proven its resilience through Covid-19 and a strong sponsor.
Analyst Darren Chan says: “We also like CLAS for its balanced mix of stable and growth income sources, which stands at 54% and 46% of gross profit in 2HFY2023,respectively. The current share price implies an FY2024/FY2025 dividend yield of 6.5%/6.8%.”
This downgrade comes on the back of the trust announcing its FY2023 ended December results, which saw distribution per stapled security (DPS) rise 16% y-o-y to 6.57 cents, surpassing its pre-Covid levels in FY2019 and FY2018.
DPS for 2HFY2023 was up 14% y-o-y to 3.80 cents and CLAS’ total distribution for 2HFY2023 grew 24% y-o-y to $140.8 million. CLAS’ manager says its properties saw strong demand as international travel continued to recover. CLAS’ gross profit for 2HFY2023 rose 12% y-o-y to $183.9 million. Revenue per available unit (RevPAU) for the period reached 103% of pre-pandemic levels, increasing by 10% y-o-y to $157. RevPAU also rose 23% y-o-y to $148 for FY2023.
See more: CapitaLand Ascott Trust's FY2023 DPS rises 16% y-o-y, surpassing pre-Covid levels
Apart from the positive results, Chan notes that gearing and interest cover remained healthy at 37.9% and 4x, respectively. CLAS’s effective borrowing cost remained unchanged at 2.4% q-o-q, with 81% of debt on a fixed rate.
“We expect the FY2024 cost of debt to increase to about 2.9% after refinancing 18% of its total debt (about $563 million) due in FY2024. A 50 basis points (bps) increase in CLAS’s borrowing cost will impact full-year DPU by 0.08 cent,” says Chan.
Meanwhile, CLAS’s portfolio valuation rose 2% as stronger operating performance and outlook mitigated the impact of higher discount and cap rates across all markets (except for Japan). Markets with valuation gains include Australia, Europe, Japan, Singapore, and UK.
Separately, CLAS is divesting Citadines Mount Sophia Singapore for $148 million, 19.4% above book value. The exit yield for this transaction is 3.2%, and CLAS will recognise a net gain of approximately $14.6 million. The divestment is expected to be completed in 1Q2024.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
On the outlook, CLAS is focused on portfolio recycling. In FY2023, the trust divested $260 million of assets at an average exit yield of 4.3%, while acquiring $530 million of assets at an EBITDA yield of 6.2%.
“We think this inorganic growth trend will continue in FY2024. CLAS also has a pipeline of asset enhancement initiative (AEI) projects to drive organic growth,” says Chan, while noting that CLAS has about $300 million in divestment gains yet to be distributed and management has indicated that it will be partly distributed to mitigate the impact of The Cavendish London being closed for renovation from 4Q2024 to 4Q2025.
Chan also expects portfolio occupancy is expected to improve as international flight capacity increases and visa-free travel arrangements are implemented. Furthermore, China as a source country accounted for 9% of the portfolio pre-Covid, but it is currently only at 6%.
As at 3.15pm, units in CLAS are trading at 92 cents.
