Why Ascott's potential acquisition won't be very beneficial for shareholders

Its effective borrowing rate is at 3.2%.

According to CIMB, ART will issue renounceable underwritten 1-for-5 rights units to raise up to S$253.7m. The rights issue will be priced at S$1 each, a 22.5% discount to the last closing price (S$1.29) and 19.5% discount to the theoretical ex-rights price (S$1.24).

The Ascott Limited owns approximately 45% of issued units in ART and has provided an irrevocable undertaking for the rights issue. The rationale of the right issue is to increase ART’s debt headroom and enhance its ability to pursue potential acquisitions.

Here's more from CIMB:

The rights issue is priced at 28% discount to its latest NAV of S$1.38, fairly steep in our view. While asset leverage will reduce from 41% to 36% post the rights issue, we expect it to be temporary given the likely acquisitions.

We think the potential acquisition is unlikely to be yield accretive for shareholders. ART’s effective borrowing rate currently stands at 3.2% and we estimate its cost of equity to be at 8.6%. ART has made acquisitions averaging c.S$325m annually in the past two years, with EBITDA yield of 4-7%.

We believe it will be difficult to find yield accretive assets given cap rates of 5-6% observed in ART’s recent acquisitions.

ART previously engaged in sizeable acquisitions within 6 months of capital raising or divestments, and we expect similar timeframe this time round.

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