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.