OUE Limited

OCBC on 11 May 2015

1Q15 PATMI fell 91.8% YoY to S$77.2m mainly due to the absence of divestment gains from the sale of Mandarin Orchard Singapore and Mandarin Gallery to OUE H-REIT recognized in the same quarter last year, partially offset by a S$57.8m gain on the sale of Crowne Plaza Changi Airport to OUE H-REIT in 1Q15. We judge these results to be within expectations; adjusted for one-time gains, 1Q15 core PATMI and revenues constitute 18.8% and 24.7% of our full-year forecast, respectively. The group remains focused on asset enhancement initiatives and active lease management at OUE Downtown and US Bank Tower, which has achieved committed occupancy rates of 89.7% and 79.6%, respectively. The extension to Crowne Plaza Changi Airport is expected to be completed by end of 2015 (and no later than June 2016) and will be divested to OUE H-REIT subsequently as part of the group’s capital recycling strategy. Maintain BUY with an unchanged fair value estimate of S$2.69 (20% discount to RNAV).

1Q15 PATMI down YoY due to absence of one-time gains
1Q15 PATMI fell 91.8% YoY to S$77.2m mainly due to the absence of divestment gains from the sale of Mandarin Orchard Singapore and Mandarin Gallery to OUE H-REIT recognized in the same quarter last year, partially offset by a S$57.8m gain on the sale of Crowne Plaza Changi Airport to OUE H-REIT in 1Q15. 1Q15 revenue was mostly stable – up 1.0% YoY to S$108.0m – as the group received higher contributions from Lippo Plaza, US Bank Tower and OUE Twin Peaks over the quarter. That said, we note that gross margins dipped from 56.5% in 1Q14 to 37.4% this quarter due to higher operating costs and recognition of rental expenses of OUE H-TRUST. We judge these results to be within expectations; adjusted for one-time gains, 1Q15 core PATMI and revenues constitute 18.8% and 24.7% of our full-year forecast, respectively. 

Asset enhancement initiatives bearing fruit
The group remains focused on asset enhancement initiatives and active lease management at OUE Downtown and US Bank Tower, which has achieved committed occupancy rates of 89.7% and 79.6%, respectively. The 10-storey extension (CPEX) to Crowne Plaza Changi Airport is expected to be completed by end of 2015 (and no later than June 2016) and will add 243 guestrooms to the development for a total of 563 rooms. Management has indicated that the extension will be subsequently divested to OUE H-REIT in line with the group’s capital recycling strategy. Finally, while the domestic high-end residential segment remains subdued, OUE will seek to drive sales at its OUE Twin Peaks project. As at end 1Q15, the group continues to enjoy a firm balance sheet with a net gearing of 40.9% and S$265.2m in cash. Maintain BUY with an unchanged fair value estimate of S$2.69.

OUE

OCBC on 29 Sep 2014

OUE announced that it agreed to invest US$200.0m (S$254.2m) in Nuvest Real Return Fund, a Cayman Islands-domiciled exempted mutual fund. The Fund, launched in 2012 with seed capital from GIC, seeks to achieve stable annual returns above inflation through diversification across a range of investment classes and active management styles. Management sees this investment as part of its treasury operations and believes this will allow optimal returns on funds held in the current low interest rate environment through leveraging the expertise of the Fund. As at end 2Q14, we note that the group has significant net cash and equivalents of S$449.3m. Overall, we are neutral on this move and prefer management to return excess capital not earmarked for allocation into the group’s core businesses over the medium to long term. That said, taking into account the investment size and terms, this investment appears fairly liquid. Maintain BUY with an unchanged fair value estimate of S$2.69 (20% discount to RNAV).

Investing US$200m in Nuvest Real Return Fund
OUE announced that it agreed to invest US$200.0m (S$254.2m) in Nuvest Real Return Fund (“the Fund”), a Cayman Islands-domiciled exempted mutual fund. The Fund, launched in 2012 with seed capital from GIC, seeks to achieve stable annual returns above inflation through diversification across a range of investment classes and active management styles. The principal of the Fund Manager is Mr Aje Kumar Saigal, who has previously held senior leadership roles at GIC. 

“Most favored nation” treatment for OUE’s participating shares 
OUE will be subscribing for Tranche X participating shares, which is made available only to key cornerstone investors. The fee structure include a 1% management fee of NAV and a 10% performance fee equal to the appreciation in NAV during each performance period, subject to a high water mark and adjusted by the hurdle rate. The shares are redeemable on the first business day of every calendar month, with a minimum notice of 45 days days, and OUE is also entitled to a “most-favored nation” treatment with regards to any rights or benefits that may be enjoyed by any future shareholders in the fund (save for those included solely as a requirement of law in the shareholder’s jurisdiction).

Optimizing returns on funds in a low rate environment
Management sees this investment as part of its treasury operations and believes this will allow optimal returns on funds held in the current low interest rate environment through leveraging the expertise of the Fund. As at end 2Q14, we note that the group has significant net cash and equivalents of S$449.3m. Overall, we are neutral on this move and prefer management to return excess capital not earmarked for allocation into the group’s core businesses over the medium to long term. That said, taking into account the investment size and terms, this investment appears fairly liquid, which can yield cash should acquisition opportunities arises ahead. Maintain BUY with an unchanged fair value estimate of S$2.69 (20% discount to RNAV).

OUE Limited

OCBC on 5 Aug 2014

OUE reported 2Q14 PATMI of S$4.4m, down 69.6% YoY due to lower contributions from Mandarin Gallery and Mandarin Orchard Singapore (now held through an equity interest in OUE Hospitality Trust), offset partially by lower finance expenses. 2Q14 topline declined 10.6% YoY to S$100.2m due to the absence of contributions from two Chinese hotels divested in Sep-13 and lower revenues from the Development Property division. Gross profit for the quarter similarly dipped 33.8% YoY to S$36.7m as cost of sales increased with the recognition of rental expense to OUE Hospitality Trust. Overall, we judge 2Q14 results to be marginally below expectations due to lower than anticipated gross margins and slower progress recognition at Twin Peaks. An interim dividend of 1.0 S-cent has been proposed. Maintain BUY with a lower fair value estimate of S$2.69 (20% discount to RNAV) as we incorporate softer residential assumptions.

2Q14 PATMI down 70% YoY to S$4.4m
OUE reported 2Q14 PATMI of S$4.4m, down 69.6% YoY due to lower contributions from Mandarin Gallery and Mandarin Orchard Singapore (now held through an equity interest in OUE Hospitality Trust), offset partially by lower finance expenses. 2Q14 topline declined 10.6% YoY to S$100.2m due to the absence of contributions from two Chinese hotels divested in Sep-13 and lower revenues from the Development Property division. Gross profit for the quarter similarly dipped 33.8% YoY to S$36.7m as cost of sales increased with the recognition of rental expense to OUE Hospitality Trust. Overall, we judge 2Q14 results to be marginally below expectations due to lower than anticipated gross margins and slower progress recognition at Twin Peaks. An interim dividend of 1.0 S-cent has been proposed.

Steady performances at both REITs
Overall portfolio occupancy at OUE Commercial REIT remained fairly healthy at 96.8% as at end Jun-14. OUE Bayfront remains 100% occupied as at 2Q14, with average passing rents for the office component increasing to S$10.66 psf from S$10.61 psf last quarter. Lippo Plaza saw its occupancy rate dip QoQ to 92.9% as at end Jun-14 from 95.9% due to some tenants not renewing their leases, though renewal rents in 2Q14 still showed a 4.3% increase versus preceding rents. At OUE Hospitality Trust, 2Q14 RevPAR at Mandarin Orchard was S$254, after adjusting for the lower available room inventory due to renovation – slightly below the forecast RevPAR of S$258, while Mandarin Gallery’s contribution was in line with forecast, with an effective rent per square foot per month of S$23.70. 

Lower S$2.69 fair value estimate
Management reports that it has recently re-opened the retail mall at One Raffles Place and expects the asset to contribute positive to earnings ahead. Looking forward, management will focus on the execution of asset enhancement works at OUE Downtown. Maintain BUY with a lower fair value estimate of S$2.69 (20% discount to RNAV) as we incorporate softer residential assumptions.

OUE Ltd

Kim Eng on 10 Jul 2014

• One Raffles Place mall reopened after a major revamp, with new tenants such as H&M and UNIQLO.
• Works continue at OUE Downtown and Downtown Gallery, which could be recycled for capital into OUE Hospitality Trust (OUEHT) and OUE C-REIT by 2017.
• Incorporating our TP for recently-initiated OUEHT and adjustments for the distribution in specie, we trim our TP to SGD2.80, pegged to a 35% discount to RNAV. Maintain BUY.

Rejoice for downtown shoppers
One Raffles Place (ORP) mall - the largest mall in Raffles Place - has 98,500 sq ft of NLA with H&M and UNIQLO among its tenants. We estimate that ~70% of the stores are in operation. Based on management’s estimates, OUE’s 41% stake in ORP (including Towers 1 & 2) may be ready for injection into OUE C-REIT by 2015. The next focus will be the conversion works at OUE Downtown, where ~264,794 sq ft of office space at Tower 1 is being converted into serviced apartments. The podium is in the process of being converted into a 159,307 sq ft retail mall called Downtown Gallery. With the conversion works expected to be completed by 2016, the serviced apartments may then be injected into OUE Hospitality Trust (OUEHT), while the remaining office space and Downtown Gallery are expected be divested to C-REIT.

Model updated; TP trimmed to SGD2.80
We adjust our model for the deconsolidation of OUEHT following its distribution in specie and incorporate the expected conversion of OUE Downtown to derive a TP of SGD2.80, pegged to a 35% discount to RNAV. Due to the deconsolidation, our FY14E-16E EPS forecasts are cut by 12.6%, 9.4% and 6.3% respectively. Further upside is possible pending more details of the Incheon integrated resort JV with Caesars Entertainment. Maintain BUY.

OUE

OCBC on 12 May 2014

OUE reported 1Q14 PATMI of S$945.6m, which is up more than 100% YoY due to fair value gains from Lippo Plaza (S$114.8m) and Mandarin Orchard Singapore and Mandarin Gallery (S$986.4m), offset by an allowance for foreseeable loss of S$105.0m from Twin Peaks. Adjusting for the impact of these one-time items, we estimate core 1Q14 PATMI at S$6.5m which is broadly within expectations. In terms of the topline, 1Q14 revenues increased 1.5% to S$106.9m; this was mainly due to new contributions of the Lippo Plaza property and the US Bank tower, offset by a S$9.1m dip in property development income. Maintain BUY. Our fair value estimate is adjusted to S$2.87, from S$3.32 previously, after incorporating into our model the new structure of the group after its listing of OUE Commercial REIT.

Significant boost from fair value gains
OUE reported 1Q14 PATMI of S$945.6m, which is up more than 100% YoY due to fair value gains from Lippo Plaza (S$114.8m) and Mandarin Orchard Singapore and Mandarin Gallery (S$986.4m), offset by an allowance for foreseeable loss of S$105.0m from Twin Peaks. Adjusting for the impact of these one-time items, we estimate core 1Q14 PATMI at S$6.5m which is broadly within expectations. In terms of the topline, 1Q14 revenues increased 1.5% to S$106.9m; this was mainly due to contributions of the Lippo Plaza property and the US Bank tower, offset by a S$9.1m dip in property development income.

Firm conditions in the CDB office segment
As anticipated, conditions in the CBD office segment were firm over 1Q14. The average core CBD occupancy rate increased to 95.7% as at end 1Q14 from 95.2% as at end 4Q13. In addition, Grade A office rentals rose 5.1% QoQ to S$10.25 psf / month as at end 1Q14. OUE Bayfront, held by OUE Commercial REIT, remains 100% occupied and saw 13.9% positive reversions to attain passing rentals of S$10.61 psf / month. For Lippo Plaza in Shanghai, its occupancy rate increased an impressive 5.2ppt from 91.3% as at end 4Q13 to 96.5% as at end 1Q14 and experienced a 9.2% positive rental reversion for new leases signed, with current passing rents currently at RMB 9.10 psm / day. Over 1Q14, the sale of residential units at Twin Peaks contributed S$9.4m in property development income; management continues to report a challenging market environment for the high-end residential property segment in Singapore.

Abundant cash for capex commitments
The group currently enjoys a firm balance sheet with S$864.6m in cash with a healthy net gearing of 41%. We note this is abundant for its committed capex needs ahead estimated at S$343.3m. MaintainBUY. Our fair value estimate is adjusted to S$2.87, from S$3.32 previously, after incorporating into our model the new structure of the group after its listing of OUE Commercial REIT.

Overseas Union Enterprise

UOBKayhian on 19 Mar 2014

FY14F EV/EBITDA (x):44.2
FY15F EV/EBITDA (x):38.7

Charging into Korea with Caesars. OUE has announced that a consortium comprising OUE, Lippo Limited and Caesars Entertainment Corporation (Caesars) has been granted pre-approval by the Korea Ministry of Culture, Sports and Tourism to develop the first internationally-branded integrated entertainment resort project in Incheon, South Korea. The project will also feature a foreigners-only casino, which will be operated by Caesars. S$1b (KRW855b) investment for Phase 1 of the project with a total GFA of 150,000 sqm comprising hotel, retail, convention and residential properties on a 4.3-ha plot of land. Phase 1 of the project is expected to be completed by early-18, in time for the Winter Olympics in Pyeongchang, South Korea. OUE has indicated that its participation will focus on the hotel component and convention centre of the project. Total investment for the project could reach KRW2.3t (S$2.7b) which is planned to be built over several phases.

Maintain BUY with a reduced target price of S$2.80, pegged at a 30% discount to our lowered RNAV of S$4.02/ share (from S$4.34) mainly adjusting for the special dividend. OUE is trading at a deep 41% discount to its RNAV. OUE had announced a 1-for-6 distribution-in-specie of OUE Hospitality Trust (OUE H-Trust) (equivalent to 14.8 S cents dividend) following the divestment of OUE Bayfront to OUE Commercial REIT. OUE will retain 34% of OUE H-Trust post divestment, down from 45% currently. In addition, OUE also announced a final cash dividend of 2 S cents/share, bringing total cash dividend for 2013 to 23 S cents/share. Books closure is on 20 March, with the crediting by 31 March.

Overseas Union Enterprise

UOBKayhian on 3 Mar 2014

FY14F PE (x): 30.6
FY15F PE (x): 27.0
Results in-line. Overseas Union Enterprise (OUE) reported 2013 attributable loss of
S$36.6m, largely due to net fair value losses on investment properties (S$46.7m), tax
provisions (S$29.7m) and forex losses (S$15.9m). Excluding these one-off items,
attributable net profit of S$49.5m is in line with our expectations.
Maintain BUY with an unchanged target price of S$3.04, pegged at a 30% discount to
our RNAV of S$4.34/ share. OUE is trading at a deep 45% discount to its RNAV.

OUE Ltd

Kim Eng on 3 Mar 2014

• Reporting a headline loss of SGD36.6m in FY13, we estimate OUE’s core PATMI to be SGD43.5m (-33.9% YoY) and below expectations, due partly to higher-than-expected taxes.
• Following the listing of OUE C-REIT, OUE has cash of SGD730.6m and is on the lookout for acquisitions.
• Trading at a 45% discount to RNAV, valuations are attractive for a company actively seeking to unlock shareholders’ value. Maintain BUY and TP of SGD2.83.

What’s New
OUE suffered a headline loss of SGD66.3m in 4Q13, mainly due to revaluation losses on OUE Bayfront, OUE Downtown and Mandarin Gallery, but offset by the fair value gain on US Bank Tower. We estimate core 4Q13 PATMI to be SGD9.7m (+964.0% YoY, -46.7% QoQ). A final dividend of SGD 2.0 cts has been proposed, in addition to the proposed distribution in specie of one OUE-held H-Trust unit for every six shares in OUE, subject to EGM approval.

What’s Our View
OUE is continuing with a series of asset enhancements. One Raffles Place’s (ORP) retail podium is expected to open by April, and ORP could be divested to C-REIT by next year. Construction of the retail podium at OUE Downtown is underway and expected to be completed by 2016.
Management is actively exploring ways to extract value out of US Bank Tower, possibly converting part of the office space into apartments for sale. As for Twin Peaks, it is contemplating converting the unsold units into rental apartments with service when it obtains the Temporary Occupation Permit in 2015. These could subsequently be on-sold to OUE H-Trust.
OUE has a track record of sussing out interesting deals and has the balance sheet to do so. We maintain our BUY recommendation and TP of SGD2.83, pegged to a 35% discount to RNAV.

Overseas Union Enterprise

UOBKayhian on 28 Jan 2014

FY14F DPU Yld (%): 8.8
FY15F DPU Yld (%): 1.7

6.3% special dividend in sight. OUE has announced a one-for-six distribution in specie of OUE Hospitality Trust (OUE H-Trust), equivalent to S$0.15 dividend or 6.3% yield, contingent on the divestment of OUE Bayfront to OUE Commercial REIT. OUE will retain 33-35% of OUE H-Trust post divestment, down from 45% currently. With the successful divestment and listing, OUE will likely announce the special dividend within the next quarter.

Maintain BUY with a lower target price of S$3.04, pegged at a 30% discount to our RNAV of S$4.34/share. OUE is trading at a deep 45% discount to our RNAV.

OUE

Phillip Securities Research, Jan 14

OUE Commercial Real Estate Investment Trust's (OUE C-Reit) investment strategy is to invest in a portfolio of income-producing commercial properties in prime commercial districts within and out of Singapore. The preliminary prospectus has been lodged with the MAS on Jan 10, 2014.

OUE C-Reit is offering a total of 433 million of units at offering price S$0.80 per unit, potentially raising approximately S$346 million. This amount includes S$166 million from a public offer of 208 million units and another S$180 million raised from a cornerstone investors-subscription for 225 million units (Summit SPV, Mr Gordon Tang, Mdm Chen Huaidan, Mr Yang Dehe and RHB Asset Management Sdn Bhd).

OUE will receive about 433 million units as part consideration (50 per cent of the total units). The projected DPU yield (distribution per unit) is 6.8 per cent for FY2014 and 6.89 per cent for FY2015 including income support.

The initial portfolio will consist of two assets: 1) OUE Bayfront (office and retail property in Singapore), and 2) Lippo Plaza (office and retail property in Shanghai).

The divestment of OUE Bayfront will allow OUE to unlock and recycle the capital for future investment/development projects for higher growth opportunities.

The establishment of OUE C-Reit will augment OUE's fund management business, thus enjoying a high recurring income stream. We are positive that the asset spin-off plan is on track.

However, while the favourable industry and economics conditions support the OUE C-Reit's stable recurring income, the weak financing profile of OUE C-Reit (aggregate leverage 42.6 per cent) may impede the financial flexibility for future developments in near term.

We have revised our target price to S$2.78 after factoring in higher expenses with FY2014 estimates introduced.

The valuation has not taken into account the asset spin-off and proposed distribution in specie upon successful listing of OUE C-Reit. We maintain "accumulate" rating.

ACCUMULATE

OUE

OCBC on 3 Oct 2013

We initiate coverage on OUE with a BUY rating and a fair value estimate of S$3.32. Our fair value applies a relatively less punitive 15% discount to RNAV due to three key reasons. First, the bulk of OUE’s portfolio is positioned in the Core CBD office micro-market which we believe will enjoy significant tailwinds in FY14; second, OUE has fairly limited exposure to the uncertain residential sector (~10% of its RNAV); and finally, management’s sharp track record in creating value, seeking accretive deals and recycling capital expediently. On 25 Sep 2013, OUE also announced it was exploring the listing of a commercial REIT on the mainboard of the SGX. The initial portfolio is expected to include OUE Bayfront and other commercial properties owned by Lippo China Resources Limited (a company listed on HKSE). While the timing and size of the listing is yet to be confirmed, we believe this capital recycling may be an attractive catalyst for value realization and a possible special dividend ahead.

Rated BUY with a S$3.32 fair value estimate
We initiate coverage on OUE with a BUY rating and a fair value estimate of S$3.32. Our fair value applies a relatively less punitive 15% discount to RNAV and we have positioned its discount on the bullish end of the spectrum for large-cap developers listed on the SGX due to three key reasons. First, the bulk of OUE’s portfolio is positioned in the Core CBD office micro-market which we believe will enjoy significant tailwinds in FY14; second, OUE has fairly limited exposure to the uncertain residential sector (~10% of its RNAV); and finally, management’s sharp track record in creating value, seeking accretive deals and recycling capital expediently.

Exploring a commercial REIT listing ahead
On 25 Sep, the group also announced it was exploring the listing of a commercial REIT on the mainboard of the SGX. The initial portfolio is expected to include OUE Bayfront and other commercial properties owned by Lippo China Resources Limited (a company listed on HKSE). While the timing and size of the listing is yet to be confirmed, we believe this capital recycling may be an attractive catalyst for value realization and a possible special dividend ahead.

Core CBD office micro-market likely to see tailwinds in FY14
A REIT underpinned by Grade A office assets may be well-received as we anticipate an environment of limited supply, firm net absorption and improving rentals in the Core CBD micro-market over 2HFY13-FY14. While we expect Grade A office rental rates to stay mostly flat YoY in FY13, we forecast a 10% YoY rise in rental rates over FY14 as an anticipated net absorption rate of 2.0m sq ft could drive vacancy rates as low as 1.6% with limited office supply coming online over that time (only CapitaGreen with 700k sq ft NLA).

Overseas Union Enterprise

CIMB Research on 7 May 2013

OVERSEAS Union Enterprise's Q1 2013 result was below expectations due to: 1) higher administrative expenses, and 2) lower-than-expected associate income. While the result looks weak, we believe the potential Reit will remain the key share price driver in the near term.

Core net profit of $14.9 million formed 15 per cent of our and consensus's full-year estimates. We cut our FY2013 core EPS estimates on higher cost assumptions and lower associate contributions, but retain our target price at $3.53 (still at a 20 per cent discount to revalued net asset value) pending an earnings call by management. Maintain "outperform".

OUTPERFORM

Singapore Property

Kim Eng on 16 Apr 2013

Developer launches reached new high. In March, developers released a record-high 3,489 homes for sale. This came barely a month after they had significantly held back new launches in February, when they sat out and assessed the impact of the seventh round of cooling measures effective on 12 Jan. As a result, the number of new homes sold in March clocked in at 2,793 units (excl. ECs), slightly more than the last peak of 2,772 homes in July 2009. Including ECs, the number of homes sold in March 2013 would be an astounding 3,072 units.

Buyers flocked to D’Nest. CDL’s 912-unit D’Nest achieved the best sales, with 699 units sold at a median of SGD963 psf. This was followed by CDL’s other project, the 868-unit Bartley Ridge, where 367 units were sold at a median price of SGD1,296 psf. Together with sales of balance units mainly at H2O Residences, Echelon and Hedges Park Condo, CDL had the largest market share for the month, accounting for 38% of all sales (incl. ECs).

Mass market projects continued to dominate sales. Other new launches that did well included Fragrance/Aspial’s Urban Vista (348 units sold; median price SGD1,503 psf), Tuan Sing’s Sennett Residence (238 units sold; median price SGD1,474 psf) and Sim Lian’s Hillion Residences (191 units sold; median price SGD1,340 psf). In total, 2,093 homes were sold in the Outside Central Region (OCR), accounting for 68% of all sales including ECs.

Not quite shoeboxes, but smaller units still in vogue. More than half of the available units at each of the top five selling projects were less than 1,000 sq ft each, with the exception of D’Nest (47% of the units). We reckon that developers were largely catering to the “sweet spot” of SGD1.5m per apartment. However, it would appear that investment demand remains fairly high, considering that owneroccupiers would anecdotally tend to prefer more spacious units.

Policy risks remain high. The strong resurgence in new home sales barely two months after the last round of cooling measures certainly implies that policy risks remain high, particularly when the Singapore economy experienced a worse-than-expected -1.4% QoQ contraction in 1Q13, based on the government’s advance estimates. Further measures could include i) mandating a Mortgage Servicing Ratio of 30% for all new private home loans; ii) further tightening the LTV ratios for third and subsequent home purchases; and iii) capping the use of CPF funds for downpayments.

Stick with retail and situational plays. CapitaMalls Asia (CMA SP) remains our top sector pick for its retail mall exposure. We also maintain our BUY recommendations on CapitaLand (CAPL SP), Keppel Land (KPLD SP) and OUE (OUE SP) for their diversified businesses and potential divestments. We maintain SELL on CDL (CIT SP) as we believe its valuations are rich despite the impressive sales in March.

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.

Overseas Union Enterprise

Kim Eng on 5 Mar 2013

Not the end, but the beginning. Despite not being successful in its attempted acquisition of a major consumer/property conglomerate in Singapore recently, OUE still has grand plans waiting in the wings. Serviced Apartments conversion in the pipeline:

• OUE mentioned that it is in talks with authorities to convert one tower of Twin Peaks and DBS Tower One into serviced apartments, which can then be combined into a hospitality REIT. It expects minimal DCcharges as the value derived from existing use is higher or equal to thevalue of the proposed development, if there is no change in GFA. There should also be minor structural alterations needed, such as escape stairways etc.
• Twin Peaks is scheduled for TOP in 2015 and is presently 13% sold (62out of 462 units). Pending URA’s approval, we think this is a good moveto ease the slow-moving high-end sales and also relieve the QC(Qualifying Certificate) requirement to sell all units within two years afterTOP; Developers are also not allowed to rent out unsold units. They pay8%/16%/24% of the land purchase price (pro-rated based on proportionof unsold units) for the 1st/2nd/3rd extra years respectively.

Unlocking value by floating a hospitality REIT:

• OUE intends to REIT its hospitality assets in the coming months. It has always maintained that there is a valuation surplus of ~SGD1bn in its hotel assets, which is not incorporated into its book value (under“Property, plant and equipment” that is not marked-to market). Floatinga REIT will help to unlock value for these assets.
• According to our estimates, if only Mandarin Orchard Singapore and Mandarin Gallery are REITed, OUE will probably be looking at the market to raise ~SGD1bn (assume 40% gearing and no sponsor units) with a portfolio size of SGD1.8bn. If all hospitality assets are REITed,including the converted Twin Peaks and DBS Tower One serviced apartments, the portfolio size is likely to increase to SGD3.2bn withequity fund raising at SGD1.9bn.
• If the hospitality REIT comes to fruition, OUE also stands to benefit from the recurring fees as the REIT manager and tax savings in millions from the tax-exemption granted to a REIT.

Overseas Expansion Plans:

• OUE sees limited growth opportunities in Singapore in the next 2-3 years, especially with existing high property prices. Following the attempted acquisition, OUE has been receiving many acquisition offers from overseas.
• It cited that land costs in some US cities are one-tenth in Singapore,and value of properties could double or triple in the coming years as the economy pick ups. OUE is also looking at assets in tier-3 cities in China for its next engine of growth. Australia and Europe are citied as countries that OUE probably will not be venturing into in the near term.
• OUE also revealed that there is possibility of the Meritus brand expanding into Chonqing and Mandarin gallery venturing into Beijing. 
• OUE remains cautious on the Iskander development, opining that there will be winners and losers in the properties build-up, as not all land parcels are equally favorable. Those land tracts facing the water-front are more attractive, but their prices have since also escalated. 

Miscellaneous:

• OUE clarified that the SGD50m break-fee for the attempted acquisition of the consumer/property conglomerate is on a reimbursement basis capped at this amount, and thus it is not supposed to profit from it. OUE estimated that it has incurred ~SGD53m in expenses from its unsuccessful bid and will be capitalizing the net SGD3m and amortizing it over three years. 
• The asset enhancement at One Raffles Place will complete by end- 2013. OUE expects rentals to spike up to SGD16+ psf/mth from current SGD13+/mth levels. 
• DBS Shenton mall (retail at DBS Towers spanning some 170k sqft) will commence refurbishment soon and has secured H&M as one of its tenants. We see further upside from this new retail place, in view of the residential units (V on Shenton, One Shenton, Marina Bay Suites, Marina Bay Residences etc.) and hotel rooms (Sofitel Singapore-Ogilvy Centre, Westin SG Marina Bay@Asia Square Tower etc.) sprouting around the downtown core area (Shenton Way and Marina Bay) in the next few years.
• The addition of 240+ rooms in the vacant land next to Crowne Plaza Changi Airport Hotel remains on track. However, it will now be positioned as an extension instead of the previously discussed Holiday
  Inn Express brand. 
• OUE is proposing a final dividend of 3 S-cts (FY11: 3 S-cts) and special
  dividend of 5 S-cts (FY 11: 8 S-cts) for FY12.