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