Performance encouraging. Market concern was that performance would continue to slide in 2Q09 on top of the steep falls in the last two quarters. Instead performance in major markets levelled off or recovered slightly. ART noted that corporate travel is showing signs of life: for instance, project group demand - which had largely dropped off as companies froze spending - is back, albeit on shorter commitments. Going forward, the manager sees "signs of stability with a slight bias towards an uptrend" as aggressive marketing efforts and steep rate cuts pay off. Singapore and China guidance was positive. We do note that our channel checks show continued rate weakness and aggressive free-nights promotions in the Shanghai and Beijing markets. Generally the extended-stay market seems to have bottomed out but the size and shape of the recovery is still uncertain, in our view.
Balance sheet concerns easing. ART recorded a revaluation deficit of S$61m, with 2Q NAV down 10% QoQ to S$1.36. The manager maintains it is comfortable within 45% leverage (40.7% now) and 3x interest cover (3.4x now), and does not need to recapitalize its balance sheet. The credit markets have unclogged and we don't expect the S$105.7m loan maturing this year to present any significant refinancing challenges. We also believe that the need for, and impact from, any recapitalization-focused cash call has diminished in view of the recent price rally and improved operating outlook. Any equity-raising attempt would likely be paired to an acquisition, in which case ART can afford to wait for even better equity pricing.
More benign expectations. Our FY09F and FY10F distributable amount estimates are up 9% and 17% over previous estimates, reflecting our expectation of stabilization at current levels. Our new SOTP value for ART is S$1.14 (prev: S$0.82). This excludes our previous cash call assumption, as its current valuation impact is minimal. Market conditions have eased dramatically and we feel the risk of further stress on ART's portfolios and balance sheet has abated. Consequently, we are lowering our "uncertainty discount" to SOTP from 25% to 15%. Our new fair value estimate is S$0.97 (prev: S$0.61). Upgrade to BUY.
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