What is the news?

OUE announced on Mar 21 that it is currently exploring the establishment of a REIT to be listed on the Main Board of SGX-ST and is in preliminary discussion with several banks. Based on its property portfolio, we believe the potential assets are Mandarin Orchard, Mandarin Gallery and Crowne Plaza Changi Airport Hotel that could be injected to form a hospitality cum retail REIT worth approx. S$2bn, based on the Dec-12 valuations as disclosed by the company. In addition, the management had in the last analysts’ briefing expressed the intention of converting part of 6 Shenton Way (former DBS Tower 1 and 2) and Twin Peaks into serviced residence. We believe these could be potential pipeline assets to be injected into the REIT if the spin-off materialized.

How do we view this?

We are positive on the revival of a REIT spin-off which died down a year ago due to unfavorable market condition then. The spin-off could help OUE to unlock its asset value and the proceeds could be redeployed into other investment and partially returned to shareholders in the form of special dividend.

Investment Actions?

We increase the valuation for its hotel assets to better reflect its market value and thus lifted the RNAV from $4.38 to $4.63. Maintain Accumulate with higher fair value of $3.24 with the same 30% discount to RNAV ascribed. We believe the discount to RNAV could further narrow to 20% should the spin-off be successful.

Source: PhillipCapital Research - 1 Apr 2013