Analysts at DBS Group Research, OCBC Investment Research have kept their “buy” calls on Capitaland Ascott Trust (CLAS) at a reduced target price and fair value respectively, while the analysts at Citi Research, PhilipCapital and CGS International have all kept their respective “buy” and “add” calls at unchanged target prices.
DBS analysts Geraldine Wong and Derek Tan have lowered their target price on the REIT to $1.15 from $1.30 previously, in anticipation of a reset in coupon rates for CLAS’s upcoming expiry of $150 million in perpetuals, from 3.88% per annum (p.a.) to 5.35% p.a. .
They also point to the disruptions of operations at the Citadines Covent Garden Hotel in the year due to asset enhancement initiatives (AEIs) which are due to be completed in August, the divestment of Citadines Mount Sophia and the 20 basis points (bps) increase in cost of debt to 3.20% for FY2025, as other factors for the change in target price.
Wong and Tan write in their July 29 report: “The new FY2024 dividend per unit (DPU) forecast of 5.7 cents does not take into account capital gains or other one-off top-ups, which amounted to around $41 million or 1.1 cents per share to last year’s DPU of 6.57 cents.”
“We see an upside to DPU following the phased completions of AEI and acquisitions during FY2024 to FY2026. Its Singapore portfolio will see a higher room count from the completion of Somerset Liang Court in 2026,” add the analysts.
In the 4QFY2023, CLAS’s portfolio revenue per available unit (RevPAU) recovered to around 103% of normalised levels, with organic growth driven by the normalisation of occupancy, primarily within the Asia-Pacific (APAC) region.
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This narrows the around 7 percentage points (ppts) occupancy gap across CLAS’s portfolio against its pre-Covid average of 85%.
Wong and Tan continue: “Within Singapore, the upside will stem from the relaunched The Robertson House, as RevPAR is expected to be around 30% higher, with full inventory released into the market from early 2QFY2024. The Paris Olympics have also caused a nice uplift to CLAS’s Paris assets, which are commanding around 50% higher average daily rates across key dates in 3QFY2024.”
The analysts expect CLAS to “stick to its strategy” of asset recycling to drive earnings and net asset value (NAV) upside, with a “healthy” gearing level of 38% and $2.0 billion in debt headroom supporting growth appetite.
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They add: “Divestment is a strategy it uses to rejuvenate its portfolio and fund AEI work, as well as meet its medium-term acquisition target for the longer stay segment to contribute around 25% to 30% of assets under management (AUM).”
The main key risk noted by the DBS analysts is the slow recovery of China’s outbound travel.
Meanwhile, OCBC analyst Ada Lim has similarly lowered her fair value to 90 cents from $1.08 previously in light of CLAS’s upcoming expiry of perpetuals.
She notes in her July 26 report that the REIT’s 1HFY2024 revenue and gross profit grew 11% and 12% y-o-y to $386.4 million and $172.9 million respectively.
“Stronger operating performance and contribution from new properties more than offset the impact of divestments, AEIs, and foreign exchange (forex) headwinds. However, dividend per share (DPS) fell 8% y-o-y to 2.55 cents – not due to any fundamental operational issues with the REIT, but mainly on the back of lower non-periodic items y-o-y,” writes Lim.
She adds: “This accounted for 44% of our initial forecast, which we deem to be in-line with our expectations given that the second half of the year is seasonally stronger for lodging.”
For the 2QFY2024, CLAS’s portfolio RevPAU was 4% higher y-o-y at $155 million, which Lim notes as “exceeding” 2QFY2019 pro forma levels by 2%.
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She writes: “This was largely due to an increase in room rates as average occupancy of the portfolio remained stable YoY at 75%. In particular, the US and Japan markets performed well, with 2QFY2024 RevPAU increasing 3% and 29% y-o-y, respectively.”
While Lim also sees CLAS’s French properties benefitting from the Paris Olympics and concerts coming in the 2QFY2024, she notes that there was “some weakness in Australia and the UK” in the past quarter due to softer corporate demand and AEI impact, respectively.
CLAS’s gearing has remained healthy in her view, coming down a further 50 bps q-o-q to 37.2% as at June 30, following the deployment of a part of divestment proceeds to pare down higher interest rate debt.
Potential catalysts noted by the OCBC analyst include stronger-than-expected lodging demand, better-than-anticipated RevPAUs and DPS-accretive acquisitions and effective capital recycling.
Conversely, noted investment risks include a slowdown in macroeconomic conditions which could curtail business travel and corporate demand, competition from new supply and unfavourable forex rate fluctuations.
On the other hand, Citi’s Lee has kept his target price of $1.12 unchanged, noting that the REIT expects its 2HFY2024 operating performance to outperform the first half, with its 3QFY2024 outlook also appearing “positive” for the majority of its six core markets, barring Australia.
On this he writes: “RevPAU in Australia fell 4% y-o-y (6% lower on same-store basis; in-line with pre-Covid) reflecting moderation in travel demand and fewer events in 2QFY2024 relative to 1QFY2024, while weakness is expected to persist in 3QFY2024 given lighter events calendar and higher base in 3QFY2023 due to one-off FIFA Women’s World Cup.”
“We see muted share price impact on healthy underlying performance mitigated by lack of visibility on non-periodic gains in 2HFY2024,” concludes Lee.
The key downside risks to his target price and investment thesis are a higher than anticipated cap rate expansion, which could exert downside pressure on asset valuations and upside pressure on gearing and a higher than anticipated borrowing cost, which could impact DPU.
PhilipCapital’s Darren Chan has an unchanged target price of $1.04. This comes off the back of CLAS remaining his “top pick” in the sector, owing to its mix of stable and growth income sources and geographical diversification, which “provides resilience” amidst global uncertainties.
He adds that $408.1 million in assets were divested across 10 mature assets at premiums to book value over the past year, which unlocked $44.6 million in gains, with an average exit yield of around 3.8%.
“Four AEI projects were completed in 1HFY2024, with another four properties under AEI expected to be completed in phases from 2HFY2024 through FY2026. This should increase CLAS’s distributable income,” writes Chan.
On his outlook, Chan sees China as a catalyst in improving the REIT’s portfolio occupancy, which currently only stands at 6% against the pre-Covid period’s 9%.
He adds: “CLAS still has around $300 million in divestment gains yet to be distributed, and we believe management may distribute some of these gains to offset the loss of income from properties undergoing AEIs.
Finally, CGSI’s Natalie Ong and Lock Mun Yee unchanged target price of $1.17 reflects the REIT’s “steady” adjusted DPU of 2.41 cents “despite $401 million in divestments and eight AEIs.”
They write: “CLAS is our top sector pick as we believe its diversified portfolio provides both stability and upside exposure to the global hospitality sector while offering portfolio reconstitution opportunities.
As at 1.14 pm, units in CLAS are trading flat at 90 cents.
