What is the news?

OUE  Ltd  is  currently  exploring  the  potential  listing of OUE Commercial  Trust,  with  initial  portfolio  to  include  its  OUE Bayfront  property and Shanghai Lippo Plaza.  OUE Bayfront and  Lippo  Plaza  are  valued  at  approximately  S$1.081  mn and RMB 2.0 bn (S$415 mn) respectively.  Higher operating expenses, higher finances expenses due to higher interest cost from more borrowings, a non-recurring loss on disposal of two China hotels and revaluation of investment properties impacted  3Q13  net  profit  37.2%  lower  y-y  (PATMI  43.9% lower y-y)  .  Despite OUE having  spun off two of its assets Mandarin Orchard Singapore and Mandarin Gallery to OUE H-Trust in July 2013, OUE H Trust continues to consolidate this  entity  as  OUE  retains  control.  Mandarin  Orchard Singapore  continues  to  be  held  at  cost  within  OUE’s balance sheet at Group Level.

How do we view this?

Should  the  listing  of  the  OUE  Commercial  Trust  ensue, another special dividend estimated at S$0.10-0.18 will likely be  in  place.  We  expect  OUE  to  retain  a  stake  in  the commercial  REIT  and  benefit  from  the  recurring  income stream  from  the growing fund management business.  With the  recent  aggressive  disposal  of  its  assets,  all  eyes  are anticipating  management’s  future  step  to  utilize  the  cash influx  into  accretive  investments.  OUE  may  look  out  of Singapore for lucrative assets in the medium term.

Investment Actions?

We  revised  our  revenue  forecast  for  FY14  after  adjusting assumptions  on  Twin  Peaks  Sales.  Maintain  Accumulate with a revised fair value to $2.82.

Growing Fund Management Business

With the recent OUE H Trust and the potential  listing  OUE Commercial  Trust,  the  fund  management  business  will expand  and  provide  OUE  with  higher  recurring  income stream.  We  believe  OUE  will  continue  to  monetize  its performing  stabilized  properties,  capitalizing  on  the heightened fair value for greater growth opportunities, which includes  acquisitions,  developments  and  redevelopment works to strengthen the OUE business.

Resilience Outlook in Office Space Rental

Investment property has achieved growth of 4.6% y-y. In the recent URA release, we still see a  positive  absorption  rate for  office  space  in  the  3Q13.  The  vacancy  rate  was  up 0.88%  q-q  due  to  completion  of  3  projects  (Asia  Square Tower 2, The Metropolis and Nexus @ One North) in 3Q13. Median rental rate for Prime Grade A office space in Central area  was  up  1%  q-q.  Steady  rental  rate  growth  for  office space  is  projected  in  FY14  due  to  the  limited  new  office supply in coming year.

Looking out of Singapore for Lucrative Assets

OUE management will consider looking out of Singapore for attractive investments for medium term as there are limited opportunities  in  Singapore.  Management  indicated  interest in  US,  Indonesia  assets  for  OUE  and  Japan  assets  as possible assets  for OUE H Trust.  The management will  tap on Lippo Group and its associated companies’ resources  for distressed  assets  without  completing  head-on  to  reap greater returns.

Source: PhillipCapital Research - 11 Nov 2013