Overseas Union Enterprise

Kim Eng on 12 Apr 2013

Initiate BUY with Street-high TP at SGD3.57. We initiate coverage on Overseas Union Enterprise (OUE) with a BUY and target price of SGD3.57, set at a 30% discount to our end-FY13F RNAV estimate of SGD5.10. Our TP is one of the highest on the Street, as we have included OUE’s opportunistic US Bank Tower acquisition. Our 30% discount primarily reflects our cautious view on the office and residential sectors. The stock is one of the most inexpensive developers in our coverage universe (adjusted P/BV of 0.7x vs sector average of 1.1x), offering 24% EPS CAGR over FY12-15F.

Hospitality REIT a near-term catalyst. We see the floating of a hospitality REIT as a near-term catalyst for OUE. Mandarin Gallery and Mandarin Orchard may be the first two assets to be injected into the initial portfolio at SGD1.8b with effective cap rates of 5.2-5.4%. This will garner DPU yields of 5.3-6.7%, which investors should find appealing. In our view, a REIT spin-off could unlock ~SGD1b divestment gain on OUE’s books, with cash raised totaling SGD841m or SGD0.92/share (assuming 30% holding in the REIT),
and perhaps a special dividend in FY13F estimated at SGD5-14 cents (5- 15% payout). Moreover, the REIT would offer a steady fee income stream (ie, management fees), tax savings and better capital efficiency.

Grand plans still afoot. OUE stands to collect ~SGD800m in cash from spinning off its assets into a REIT. This would provide it with fresh dry powder for future acquisitions, with management having set sights on the US and China. With a presence in the hospitality, office, retail and high-end residential segments, OUE is an almost pure play on the Singapore property sector. As most of its assets are in the prime Orchard  Road/Raffles Place locations, it is well-positioned to ride the growth momentum in the hospitality segment and new Grade A offices.

Hospitality at its best. OUE has over 1,900 rooms in its hotels, making it one of the largest hotel room owners in Singapore. Its hotels cater to both leisure (Mandarin Orchard) and transit (Crowne Plaza Changi) visitors. This has enabled the company to benefit from the tourism boom in recent years. We expect OUE will record an average SG occupancy rate (AOR) of 85% and average room rate (ARR) of SGD280-300 over the next three years.

Well-located office and retail assets. OUE owns prime office buildings in the Singapore CBD. OUE Bayfront and One Raffles Place (ORP), with their high-quality, new Grade A offices, are its crown jewels and have seen healthy rentals of ~SGD9-10psf/mth. Further rental upside could come from

DBS towers 1 and 2 following DBS Bank’s shift to MBFC Tower Three. DBS Bank used to pay SGD4.90 psf/mth compared with the current rental of SGD6.18 psf/mth. OUE also owns a high-end retail mall on Orchard Road (Mandarin Gallery) and another mall in the CBD (ORP retail podium). It plans to revamp the retail podiums at ORP and DBS towers and we believe this move would yield rich returns, given the limited amount of quality retail space in the CBD area.