Overseas Union Enterprise - Outperformance could be behind us

Overseas Union Enterprise (OUE) has outperformed the sector by 10% YTD, with its listing of OUE Hospitality Trust.

■ Investors seeking exposure to Singapore office and hotel sectors may prefer REITs with higher liquidity.

■ Despite the partial sale of Mandarin Orchard and Mandarin Gallery, OUE should still provide 10% EPS CAGR in 2012– 15E.

We downgrade our price target to SGD 2.87 (from SGD 3.58) and our rating to In-Line.

OUE successfully listed its hospitality REIT:
OUE listed OUE Hospitality Trust (OUEHT) on 25 July. Management proposed a SGD 0.21 dividend per share, equivalent to 50% of the divestment proceeds. We think OUE could book a revaluation gain as Mandarin Orchard was divested for SGD 1.2bn, higher than the book value of SGD 115mn. According to management, OUE will maintain its 48% stake in OUEHT. We expect the dividend to be paid by end-2013.

Outperformance could be behind us, given lower liquidity:
OUE has outperformed the sector year-to-date by 10%, as other developers have fallen 19-24%, and office and hotel REITs have slid 9-17%. Investors seeking exposure to Singapore office or hotel capital values are more likely to prefer pure-play REITs in these sectors, given uncertain market conditions. Large-cap liquid office and hotel REITs trade up to SGD 10mn/day, compared to OUE’s SGD 4mn/day.

Potential upside surprise:
We see limited acquisition opportunities in Singapore for OUE, given low office and hotel cap rates. We continue to expect OUE to develop a mall at 6 Shenton Way and a new hotel annex at Crowne Plaza Changi Airport. These projects should provide a 2012-16 EPS CAGR of 10%

Downgrade to In-Line:
We revise our RNAV estimate to account for OUEHT and expect payment of a dividend of SGD 0.21/sh by end-2013. Our price target of SGD 2.87 is set at a historical average P/RNAV of 0.62x (0.70x previously). This provides 4.3% potential upside and a 7.6% dividend yield (a total return of 12%). We downgrade our rating to In-Line from Outperform.

Risks to our call include a recovery in the prime residential sector and higher than- expected office and hotel capital values. (Read Report)

Read Related Report
OUE Hospitality Trust - The only pure Orchard Road play
Friday, 13 September 2013
- OCBC Research

Source : Standard Chartered Equity Research

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