1. Understanding the business
Firstly, this stock is a Real Estate Investment Trust (REIT), meaning it operates very differently from typical growth companies. Rather than making an actual product or service, REITs uses investors’ money to invest in properties. The Ascott limited is a wholly owned subsidiary of CapitaLand and is listed in the SGX mainboards in 2006.
They mostly buy or rent existing properties rather than building their own and then renting it out. Because of this, most (or all) REITs have a distribution policy where it is required to distribute at least 90% of its taxable income, other than gains from the sale of real estate properties that are determined by the IRAS to be trading gains, and net overseas income. This factor is extremely important and I will explain it further below.
2. Does the company have any moat, which makes it very difficult for competitors to penetrate the company’s market share?
While there is a vast diversity of REITs that exist in the market, we have to understand that most of them deal in different infrastructure fields – some healthcare, some office buildings and some vacation spots. For Ascott REIT, they deal with serviced residence, with no other known REITs in the same field outside the US.
Currently, they are established as the world’s largest serviced residence owner-operator with over 22,000 operating serviced residence units in key cities of Asia Pacific, Europe and the Gulf region, as well as over 10,000 units which are under development, making a total of more than 33,000 units in over more than 200 properties. Its portfolio spans over 82 cities across more than 20 countries. (Wikipedia)
This makes it nearly impossible for any other company or competitor to break into the serviced residence REIT market.
However, we should note that anyone in the world can operate a serviced apartment, and with the popularity of websites such as www.airbnb.com , it makes individually owned serviced apartment much easier to book. Therefore while there isn’t a major competitor against Ascott, we cannot overlook the impact of individual home owners that is also a part of this industry.
3. Does this business operate in a non-exciting industry?
Prior to anything, we should understand why we are discussing about this factor. In an ‘exciting’ industry such as mobile phones and laptops, various companies are cutting each other’s costs all the time, thus it is extremely unprofitable to get involved in these price wars for shareholders and investors. Furthermore, a new invention/breakthrough will most likely be adapted by different companies in a short amount of time and thus a price war will always be inevitable.
Therefore, in the case of Ascott REIT, there isn’t much competitor nor ‘breakthrough houses (is that even a thing?)’ that can cause a price war for this REIT. Furthermore, every apartment has its own benefits and level of luxury, thus suiting a wide spectrum of tourists and guests. A price war is very unlikely to happen as the only competitors are individual homeowners.
4. Was the company successful in a couple of locations before expanding nationally?
Before Ascott was formed, CapitaLand was already a large-cap company that deals in the estate business. Starting in Singapore, Ascott has saw merger and acquisition activities throughout Asia and into Europe, merging and buying over several companies to become the largest group of serviced residences owner-operator.
‘The past two decades saw merger and acquisition activities involving real estate and hospitality players in Singapore like Scotts Holdings, Pidemco Land, Somerset International, Liang Court, Stamford Group and DBS Land. These developments eventually led to the establishment of The Ascott Limited, the largest serviced residence owner-operator outside the United States, with a global presence spanning over 60 cities around the world. In 2006, the company established the world's first pan-Asian serviced residence real estate investment trust, the Ascott Residence Trust (Ascott REIT). Then in 2009, The Ascott Group Limited celebrated 25 successful years as the top international serviced residence owner-operator.’ (Wikipedia)
We can see that the group’s movement and management is very well planned and executed. They are also fast and decisive in their expansion and grabbed monopoly of the serviced residence industry extremely quickly.
5. Has the company dominated in a particular segment of the market?
While we cannot say that the company has fully dominated this particular segment due to the large number of individual homeowners, we can say that the company has dominated in the serviced apartment REIT market.
6. Is this company operating in a hot industry?
Residences and apartments aren’t exactly hot, unless they are on fire, which is bad for shareholders. Jokes aside, hot means that a company has to continually innovate new products to maintain the competition in the market (such as mobile phones), so no its not.
7. What is the company’s earnings growth over the previous 9 years? Does it grow constantly?
Fiscal year ends December except 2015, where only June end results are available. EPS is based on the ‘group’ not the ‘trust’ in financial reports.
|
Year
|
EPS (cents)
|
|
06
|
5.78
|
|
07
|
27.64
|
|
08
|
(6.94)*
|
|
09
|
(3.44)*
|
|
10
|
20.79
|
|
11
|
16.06
|
|
12
|
14.30
|
|
13
|
16.17
|
|
14
|
7.92
|
|
15
|
3.09
|
*Negative EPU for 4Q 2008, YTD December 2009 and YTD December 2008 was mainly due to the deficit on revaluation of serviced residence properties. Valuation was conducted by HVS International Pte Ltd on the Group’s serviced residence properties in December 2008 and December 2009. This can be attributed to the crash in housing prices during the financial crisis of 2008. Following the recent financial downturn as China’s property bubble burst, we can see that the EPS dropped quite drastically in the year 14 and 15.
As we can see, the group’s earning per share fluctuates greatly throughout the years, as this results could wave a huge red flag when dealing with regular companies, we should know that in REITs, nearly everything they are comprised of are properties. Therefore property valuations will affect this factor greatly as compared to manufacturing or services. Having said that, the average EPS in the past 10 years is about 10%. This is quite a decent value but technically speaking, their growth decreased from 2006 as compared to now.
8. Retained earnings
Retained earnings of Ascott REIT from 2006 to 2015 = 101.37 cents = $1.0137
Change in market price of the stock from 2006 (IPO, unreflected in graph) = 1.20 – 0.68 = $0.52
Each dollar retained by the company generates a ~$0.51 return in stock price.
If the open trading price of ~$1.60 was used instead, the company’s retained earning will be generating a loss. This is a pretty inferior value.
9. Owner income
|
Year
|
Net income /profit after tax
($’000)
|
Depreciation and
amortization($’000)
|
Capital expenditure($’000)
|
Owner earnings($’000)
|
|
2006
|
27,331
|
2,989
|
10,902
|
19,418
|
|
2007
|
48,675
|
9,071
|
15,096
|
42,650
|
|
2008
|
64,315
|
5,270
|
17,718
|
51,867
|
|
2009
|
51,527
|
6,088
|
16,735
|
40,880
|
|
2010
|
61,132
|
6,539
|
19,118
|
48,553
|
|
2011
|
97,943
|
9,105
|
26,892
|
80,156
|
|
2012
|
105,547
|
10,799
|
30,844
|
85,502
|
|
2013
|
105,602
|
13,511
|
33,410
|
85,703
|
|
2014
|
119,016
|
16,267
|
39,519
|
95,764
|
In this case, capital expenditure is calculated under staff costs.
Following a slight decline in 2009, owner earnings is rising steadily since the start of the REIT. We should treat this data with more weightage as compared to traditional stocks as mentioned earlier, REITs HAVE to distribute at least 90% of their income by law. Therefore as this value increases, so will the dividends to shareholders.
10. Company’s current ratioNet assets / Total liabilities for year 2013:
2,187,130/1,394,867 = 1.568
Net assets / Total liabilities for year 2014:
2,353,236/1,768,656 = 1.331
These show that the company has more than enough assets to pay off its debts. However, we should note that in the case of REITs, majority of its assets are its properties, while most of its liabilities are long term debts (due to payables of properties). Therefore, the current ratio assumes the company is able to pay off its debt IF they sell off their current properties, which is extremely detrimental to the company. On the bright side, long term debts usually do not have to be repaid that near in the future.
Having said that, let’s take a look at their CURRENT (as of June 2015) assets vs liability. For example, available cash balances and expiring short-term debts.
Current assets / current liabilities for year 2015:
554,874/ 510,293 = 1.087
The company can take money on hand to pay off any debts that they are about to encounter. While not extremely good and safe, there are also no problems here. For a REIT, that is actually pretty good.
11. Return on equity (ROE)
Simply put, ROE is how much profit the company is generating with the shareholder’s money. It is defined by ROE = Net income / Shareholder (total) equity.
Since shareholder equity isn’t available online I’ll have to calculate it manually from financial reports
|
Year
|
06
|
07
|
08
|
09
|
10
|
11
|
12
|
13
|
14
|
|
Shareholder equity (S$’000)
|
714,987
|
1,038,613
|
964,964
|
896,797
|
1,490,094
|
1,628,030
|
1,640,970
|
2,353,236
|
2,187,130
|
|
Year
|
06
|
07
|
08
|
09
|
10
|
11
|
12
|
13
|
14
|
|
ROE
|
3.82%
|
4.6%
|
6.7%
|
5.7%
|
4.1%
|
6.0%
|
6.4%
|
4.5%
|
5.4%
|
While the ROE % is very low compared to conventional companies, we have to bear in mind that this is a REIT. Therefore they have a much larger shareholder equity compared to them, which causes the low ROE. However, we can see that there is a slight, gradual increase in ROE over the years, albeit dropping a little in the recent years. The number is also very stable and as long as there is a ROE, the company is earning money. Companies that aren’t earning money that year do not have a ROE. These values are decent.
12. Gross profit margin, does it grow or at least maintain?
Gross profit margin is defined as net profit/revenue expressed in %.
|
Year
|
Gross profit margin %
|
|
2006
|
30.43
|
|
2007
|
31.44
|
|
2008
|
33.43
|
|
2009
|
29.34
|
|
2010
|
29.50
|
|
2011
|
33.93
|
|
2012
|
34.74
|
|
2013
|
33.35
|
|
2014
|
33.31
|
13. Return on assets, does it grow or at least maintain?
Return on assets is a factor that shows how much money the company is earning with its assets. It is defined as ROA = net income / total assets.
|
Year
|
06
|
07
|
08
|
09
|
10
|
11
|
12
|
13
|
14
|
|
ROA
|
2.54%
|
2.88%
|
3.81%
|
3.1%
|
2.18%
|
3.24%
|
3.51%
|
3.03%
|
2.87%
|
14. Dividends payout ratio
As mentioned above, REITs have a policy to pay out at least 90% of their net profit as dividends. The past 6 years of dividend yield for Ascott REIT are
|
Year
|
10
|
11
|
12
|
13
|
14
|
15
|
|
Yield
|
7.35%
|
5.48%
|
6.98%
|
7.27%
|
6.21%
|
6.59%
|
As we can see, the yield for REITs are generally very high. This also means that should the company does badly due to financial recessions, natural disasters or outbreak of pandemics. Their profit will drop and since 90% of the profit are distributed as dividends, it will hammer the stock price hard. Likewise, should their expansion sees success and if globally people are having more vacations due to improvements in the economy, REITs in general should see a rise in stock prices. However one should not view REITs as a growth stock and more of a dividend stock.
15. Shares buyback
The company has not done any share buybacks. This factor is quite irrelevant as in a REIT, companies tend to keep increasing their number of shares to generate funds to purchase more properties. The number of issued shares has grown from 498,638,579 in 2006 to 1,522,495,000 in 2014. If you see any other conventional companies having this amount of growth in stocks, you should probably read more about it to check if there are any stock-splits (generally good) or desperate fund raising (bad). However, with the growth of stocks to nearly 3x the initial amount, the stock price doesn’t seem to be dropping much. That is a good sign as it shows that the company is able to maintain its worth as they issue more stocks.
16. Others / personal opinionThe majority of shares are held by Ascott REIT management (30.27%) and its parent company, CapitaLand limited (15.78%). This is good as it shows an alignment of interest between shareholders and company management. They are also not under risk of hostile takeovers anytime soon. Since we can’t really make a fair judgment based on EPS growth, mainly due to the fact that property valuations can fluctuate greatly and this doesn’t mean that property is getting better or weaker, we can take a look at the other factors.
Firstly, their net income is rising steadily throughout the years. Secondly, their total assets and current assets are also showing signs of growth. However, the company might be issuing too much shares on hand that the diluted EPS is actually dropping. The over issuing of shares also resulted in a drop of dividends distributed per share, which has been reflected in its share price.
The large growth of shares from non-split actions are common in REITs as they require shareholder funds to expand. Given the recent Europe economy crisis, the group’s income took quite a hit but Europe seems on track to recovery, which will signal good returns for the group. With the Asian economy at quite a trough now, property prices and valuations would also be quite low and people generally don’t travel a lot during economic downturns.
Personally I expect Ascott REIT to grow quite a substantial amount when the economy starts to pick off. The group has taken over a lot of properties in China and Australia in recent years, with the recent plunge of AUSSGD, the income of the group is also affected. I believe china property prices would start to appreciate in the upcoming years following the burst of the bubble. As serviced apartments become increasingly popular recently, I believe Ascott REIT is a good stock to hold for dividends throughout the years.
Since they have properties in most parts of the world, currency fluctuations between Euro, Yen, USD etc would have its risk hedged as they would be making money no matter which currency appreciates or depreciates.
IMO: 8/10
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