3Q13 affected by higher borrowing costs and one-off expenses. OUE reported lower-than-expected 3Q13 net profit of SGD13.4m (-8% QoQ, -44% YoY), due mainly to higher borrowing costs as well as a SGD5m loss from the sale of its two hotels in China. 9M13 PATMI fell short, coming in at just 33% of our full-year estimate. Maintain BUY with a revised TP of SGD3.05, pegged to a 30% discount to RNAV following a transfer of coverage.

Expenses on the rise. Besides higher borrowing costs arising from fair value loss on derivatives, other OPEX also increased on higher legal and professional fees incurred in the listing of OUE Hospitality Trust (OUEHT). 3Q13 PATMI would have been even lower, if not for a SGD4.9m tax credit as opposed to a SGD4.4m tax charge in 2Q13. OUE Bayfront suffered a marginal SGD72.2m fair value loss, which was offset by a SGD73.1m fair value gain on US Bank Tower.

MOS and MG remain consolidated within OUE. OUE spun off Mandarin Orchard Singapore (MOS) and Mandarin Gallery (MG) into OUEHT, which was listed in Jul 2013. Despite the fact that MOS was transacted at SGD1.2b, the asset remains consolidated on OUE’s balance sheet at historical cost less accumulated depreciation (~SGD115m) due to the adoption of FRS110 – a new accounting standard that requires investees to be consolidated if the investor retains control over the former, regardless of its equity stake.

Next up, OUE Commercial Trust? Following the listing of OUEHT, OUE is exploring the listing of a commercial REIT comprising OUE Bayfront as a seed asset, along with Lippo Plaza in Shanghai, currently held by HK-listed Lippo China Resources Limited. While we see this positively as it will strengthen OUE’s fund management business and raise the probability of bumper dividends in FY14, we will also keenly watch how OUE will redeploy the balance of the proceeds.

Valuations are inexpensive. We cut our FY13-15 forecasts by up to 45% after factoring in higher cost of borrowing and adjusting our sales assumptions for Twin Peaks. Nonetheless, OUE currently trades at 0.6x FY14 P/B and 0.55x FY14 P/RNAV, which we think are inexpensive. We expect some re-rating with the fruition of the commercial REIT listing, which is likely to happen in 2014.  

Source: Maybank Kim Eng Research - 11 Nov 2013