Orchard Parade Holdings

Kim Eng on 6 Jul 2102


Orchard Parade Hotel (OPH) valuation. At SGD1m per room (pr), we think the valuation of OPH may be on the high side, given that the recently-refurbished Orchard Hotel1 (owned by CDL Hospitality Trusts), just across the street, is valued at SGD686k pr (35.4% discount). Since this amount is earmarked as the minimum sale consideration2, we think risks to the reservation price remain firmly on the upside for OPHL shareholders.

Selling only 50-year leasehold. Similar to KepLand’s 99-year injection of Ocean Financial Centre (OFC) (located on a site on a 999-year leasehold) into K-REIT Asia, only a 50-year leasehold of OPH (located on a site that is almost freehold) will be sold to Far East H-REIT. Thus, OPHL will be able to recover the asset after 50 years for redevelopment, or land sale, thereafter.

Unlocking the value in YHS at a premium. OPHL has always been a passive investor of YHS and considers this investment to be non-core. The asset swap transaction provides OPHL with an opportunity to divest its 35% stake in YHS at SGD1.80 — a 63.6% premium to its 31 Mar 2012 NAV per share. Since the restructuring announcement, YHS has risen in value by 16%. We think OPHL shareholders stand to benefit from the ensuing upside with the allotment of dividend in specie of 0.229 YHS share per OPHL share. Moreover, if YHS does attract the interest of bigger players, such as Danone, Kraft, or Unilever, the subsequent buyout may generate even higher returns for OPHL shareholders.

Restructuring enhances the recurring income stream of OPH. The acquisition of (1) medical units, (2) a hospitality management business, and (3) a 33% interest in the REIT manager and Trustee-Manager (Far East H-Trust) will enhance the recurring income stream of OPHL, not to mention the returns from existing property development and investment business. The restructuring also allows OPHL to expand its business to cover all aspects of the hospitality industry

Good deal for OPHL and investors should hold on to the stock. In our view, the proposed restructuring is a good deal for OPHL, based on the favourable selling prices of the hospitality assets/YHS stake and the higher recurring income streams (downside protection in an economic slowdown), which OPHL will receive, after the restructuring. We advise existing investors to vote in favour of the proposed restructuring on 11 Jul 2012 EGM. Initiate with a HOLD and SGD2.37 TP based on 25% discount to 1Q12 NAV of SGD3.16.

Orchard Parade Holdings

DMG & Partners Securities on June 13

WE initiate with a BUY on Orchard Parade Holdings (OPH): We see OPH as a restructuring play, with catalysts arising from 1) spinning off its hospitality assets into a Reit, which will enable the group to monetise its hotels at a good valuation and create a platform for sustainable growth, 2) management has designated its 49.5 per cent stake in Yeo Hiap Seng (YHS) as a non-core investment that could be divested if a right offer comes along.

A sale could release as much as $340 million in surplus capital to redeploy into its real estate business. The recent appointment of Lucas Chow as CEO, after a long period without a CEO at the group, signifies a more active phase of restructuring and asset recycling going forward. Our target price of $2.20 is based on a 30 per cent discount to its RNAV of $3.15. The stock has 39 per cent potential upside.

Hospitality Reit - a platform for sustainable growth: Having examined various options to create an entity for sustainable growth, management sees the Reit platform as the most suitable to achieve its growth objectives.

Besides OPH's existing two hotels and its Central Square serviced residence, parent Far East Organization has at least another five hotels and numerous serviced residences within its fold that could form the pipeline assets for the Reit.

Bullish outlook for Singapore hospitality: We are bullish on the Singapore hospitality sector, given favourable demand-supply dynamics and structural growth drivers. Monthly tourist arrivals to Singapore continue to trend above the one million mark for the 13th consecutive month in March, driving up both rates and occupancy levels. Meanwhile, a host of new attractions (River Safari, International Cruise Centre, Gardens by the Bay) and MICE events will continue to keep room demand buoyant.

The STB projects a CAGR of 3.5 per cent in room supply over the next three years; this is outpaced by the 6.6 per cent CAGR in tourist arrivals.

Trim and Fit: OPH has steadily improved its balance sheet and trimmed gearing over the years. We see the group taking a more proactive stance in restructuring its balance sheet further to further optimise returns on capital. We believe this will enable the group to narrow the discount to RNAV from the current 45 per cent.

BUY