DBS starts coverage on ARA H-Trust with 'buy' call on vaccine, earnings optimism

Singapore

DBS Group Research on Thursday initiated coverage on ARA US Hospitality Trust (ARA H-Trust) with "buy" and a target price of US$0.69, implying an upside of over 50 per cent.

Stapled securities of ARA H-Trust closed 6.2 per cent or US$0.03 higher at US$0.515 on Thursday.

With the progressive rollout of Covid-19 vaccines in the US, the research team believes that the worst is over for ARA H-Trust and investors are not pricing in its ability to double its earnings over the next two years as travel normalises.

DBS analysts Geraldine Wong and Derek Tan said the stapled group is positioned mainly in the select-service hotel subsector, which has strong growth potential.

The select-service subsector has been proven historically to have more operational efficiency and flexibility, compared to full-service branded hotels, they noted.

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"This means ARA H-Trust has the ability to maintain profitability at lower room rates while peers are likely to remain in the red in the current nascent recovery period," the research team said.

The trust's potential to generate normalised yields of more than 15 per cent from fiscal 2023 as earnings recover is attractive, the analysts said.

They project a multi-year growth trend for revenue per available room (RevPAR) and a four-year normalisation period, delivering fiscal 2021 and fiscal 2022 yields of 5.9 per cent and 12.8 per cent respectively.

"A swing towards pre-Covid-19 RevPARs in the medium term implies ARA H-Trust can offer dividend yields at close to 15 per cent, one of the highest among peers," Ms Wong and Mr Tan added.