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