We initiate coverage on OUE Commercial REIT with a BUY rating and fair value estimate of S$0.88. We are constructive on the SG prime office outlook, which makes up 69% of OUE-CT’s portfolio value, and forecast that limited supply and continued steady absorption will drive Grade A rentals up by 10% - 20% over FY14-15. Contributions from OUE Bayfront, now boosted by income support, will likely be sustained at current levels or higher after the support arrangement ceases after FY17. Also, given three large ROFR assets in its potential acquisition pipeline, we see ample scope for meaningful growth ahead; large yield-accretive acquisitions could result in DPU growth, higher trading liquidity and unit price appreciation. Finally, we believe that OUE-CT shows attractive relative value versus peers. Despite providing one of largest exposure to the premium office space in Singapore (only second to Keppel REIT), OUE-CT offers a forward yield of 6.9% - the second highest in its peer group (average: 6.7%). Its price-to-book ratio of 0.76 is also lowest amongst peers.
Initiate with BUY and fair value estimate of S$0.88
We initiate coverage with a BUY rating and fair value estimate of S$0.88. The Reit offers an estimated forward FY14 yield of 6.9%, and its portfolio consists of two assets: OUE Bayfront, a premium office building in Raffles Place, Singapore, and Lippo Plaza, a Grade-A commercial building in Huaihai Zhong Road, Shanghai. Our investment thesis rests on three key components.
Domestic prime office outlook is positive
First, we are constructive on the prime office outlook in Singapore, which makes up 69% of OUE-CT’s portfolio by asset value. While Grade A rentals declined 13.7% over 3Q11-3Q13, the downtrend reversed in 4Q13 when rentals registered a 2.1% QoQ uptick and core CBD vacancy rate improved 167 bps to 4.8%. In addition, overall office demand remained firm; FY13 island-wide net absorption came in at a healthy 2.1m sq ft - significantly higher than the 10-year average of 1.6m sq ft. We forecast that limited supply and continued steady absorption will drive Grade A rentals up by 10% - 20% over FY14-15. Contributions from OUE Bayfront, now boosted by income support, will likely be sustained at current levels or higher after the support arrangement ceases after FY17.
Ample scope for growth through accretive acquisitions
Second, OUE-CT’s market cap is currently the lowest in its peer group of office S-REITs. Given three large ROFR assets in its potential acquisition pipeline, we see ample scope for meaningful growth ahead; large yield-accretive acquisitions in the future could result in DPU growth, higher trading liquidity as its market cap and assets increases, and unit price appreciation.
Attractive pricing versus peers
Finally, we believe that OUE-CT shows attractive relative value versus peers. Despite providing one of largest exposure to the premium office space in Singapore (only second to Keppel REIT), OUE-CT offers a forward yield of 6.9% - the second highest in its peer group (average: 6.7%). Its price-to-book ratio of 0.76 is also lowest amongst peers.
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