OUE Commercial REIT - Attractive valuation beyond near-term dilution


OUECT’s 2QFY15 distributable income rose 2.6% yoy on Lippo Plaza's better performance, but DPU slid 29% yoy on dilution impact of its rights issue. 1H15 DPU was in line, at 46% of our FY15 forecast. Moving forward, we expect growth to come from higher occupancy and rental reversion at OUEB as well as ORP's additional contribution and better occupancy. We cut our FY16 DPU by 14% and DDM-based target price to factor in near-term dilution from its rights issue. However, we keep our Add rating, as its FY16 dividend yield of 7.9% remains attractive compared to the peer average of 7.1%.

Higher rental reversion, but lower occupancy
OUECT’s 2QFY15 distributable income was up 2.6% yoy, largely on higher rental income from Lippo Plaza (LP) that offset higher property expenses. DPU slid 29% yoy due to the dilution impact of the rights issuance in anticipation of the One Raffles Place (ORP) acquisition, broadly in line with our estimate. Rental reversions at both OUE Bayfront (OUEB) and LP were commendable at 14.6% and 12.9% respectively. However, both recorded a drop in occupancy from 98-99% in the previous quarter to ~95% as at end-2Q15. The dip in occupancy at OUEB is largely due to the non-renewal of a lease, and should improve as the manager has since back-filled about 52% of the space vacated.

Room for growth in Singapore
We believe there is further room for growth in OUECT’s Singapore properties, from both increase in occupancy and rental reversion. OUEB’s occupancy should rise from the current 95% and continue to record healthy rental reversions as its passing rent of S$11.04 psf pm remains below recent signing rent of S$12-14.50 psf pm. We also believe there is room for improvement at both ORP’s occupancy, estimated at 85-90% by DTZ. Better performance at OUEB and ORP should more than offset potential weakness at LP (17% of enlarged portfolio revenue) from the incoming supply of office in Shanghai.

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Maintain Add on attractive valuation
We note near-term dilution, as the rights issue closed on 27 Jul 2015 and more income from ORP is only expected in 4Q15. However, we keep our Add call as its FY16 dividend yield of 7.9% is superior to the peer average of 7.1%. (Read Report)

Source : CIMB Research

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