• OUE Commercial REIT lodged preliminary prospectus with MAS
• Initial Portfolio – The OUE Bayfront Property and The Lippo Plaza Property
• IPO to raise S$346 million
• Indicative Distribution Yield of 6.8% in 2014, 6.89% in 2015
• Maintain Accumulate Rating with revised TP $2.78

What is the news?

OUE  Commercial  Real  Estate  Investment  Trust  (“OUE  C-REIT”)’s  investment strategy is to invest in a portfolio of income-producing commercial properties in prime  commercial  districts  within  and  out  of  Singapore.  The  preliminary prospectus has been lodged with MAS on 10 Jan 2014.

Highlights  from  the  preliminary  prospectus:  OUE  C-REIT  is  offering  a  total  of 433M  of  units  at  offering  price  $0.80  per  unit,  potentially  raising  approximately S$346M.  This  amount  includes  S$166M  from  a  public  offer  of  208M  units  and another  S$180M  raised  from  a  cornerstone  investors-subscription  for  225M units(Summit SPV,Mr Gordon Tang, Mdm Chen Huaidan, Mr Yang Dehe and RHB Asset  Management  Sdn  Bhd).  OUE  will  receive  about  433M  units  as  part consideration (50% of the total  units).    The projected DPU yield is 6.8% for FY14 and 6.89% for FY15 including income support.

The  initial  portfolio  will  consist  of  two  assets;  1)  OUE  Bayfront  (office  and  retail property in Singapore), and 2) Lippo Plaza (office and retail property in Shanghai).

How we view this

The divestment of OUE Bayfront will allow OUE to unlock and recycle the capital for  future  investment  /  development  projects  for  higher  growth  opportunities. The establishment of OUE C REIT will augment OUE’s fund management business, thus enjoying a high recurring income stream. We are positive that the asset spin off  plan  is  on  track.  However,  while  the  favorable  industry  and  economics conditions support the OUE C-REIT’s stable recurring income, the weak financing profile  of  OUE  C-REIT  (aggregate  leverage  42.6%)  may  impede  the  financial flexibility for future developments in near term.

Investment Action

We have revised our TP to S$2.78  after factoring in higher expenses with FY2014 estimates introduced.  The valuation has not taken into account the asset spin off and  proposed  distribution  in  specie  upon  successful  list  of  OUE  C-REIT.  We maintain Accumulate rating.

Source: Phillip Securities Research - 14 Jan 2014