• OUE FY13 revenue increased 4.5% y-y to $436.6mn, mainly due to the higher revenue recognition from property development
• Recorded a net attributed loss of $36.6mn in FY13 ($90.1mn in FY12), largely due to net fair value losses of $76.8mn
• Strong cash position of $730.6mn from listing of OUE H Trust
• Propose a final dividend of 2 cents per share, bringing total cash dividend for FY13 to 23 cents per share
• Special distribution-in-specie of OUE H Trust in 1Q14
• Maintain Accumulate with new FY14 TP $2.70

What is the news?

OUE recorded FY13 revenue at $436.6mn (4.5% yoy) with higher revenue recognition from Property Development division and revenue contribution from US Bank Tower. However, higher operating expenses, a net fair value loss of $76.8mn of OUE investment properties (OUE Bayfront and OUE Downtown) and the loss on disposal of the 2 China hotels hit the PATMI to a net loss of $36.6mn, below our expectations. Excluding the non-cash items, the PATMI was $40.2mn. Following the listing of OUE C REIT, OUE has announced a 1-for-6 Distribution In Specie of OUE H-Trust (equivalent to S$0.15 dividend), where Entitled shareholders will receive 1 OUE H-Trust stapled Security for every 6 OUE shares after book closure date 20 March 14. The OUE H-Trust stapled securities shall be credited on 31 March 14. OUE will reduce its stake of OUE H-Trust to 33.3% post distribution and will no longer consolidate OUE H-Trust to the Group.

How we view this

With the non-consolidation of the OUE H-Trust, OUE will realise a huge gain of about $1bn in FY14 from the divestment of Marina Orchard Singapore since Mandarin Orchard Singapore is held at cost within OUE’s balance sheet at Group Level previously, thus improving the book value of the Company.

Excluding the 50% stake OUE retained in the listing of OUE C-REIT, the company is to receive cash proceeds of over S$300mn, furthering strengthening the current cash position of $730mn. The current asset enhancement / development works on OUE Downtown partial conversion to serviced apartments / retail and Crown Plaza extension will deploy a capex of estimated $260mn. Possible plans in future are conversion of partial US Bank Tower to residential units and one tower of Twin Peaks to leased apartment with service. We expect OUE to utilize the remaining capital to repay debt while embarking on new acquisitions, likely overseas properties with limited opportunities in Singapore. The management has indicated they are in the midst of securing new deals, but unable to disclose more details for now.

Looking forward is the completion of asset enhancement of ORP retail podium in 1H14. Per our understanding, ORP retail podium has achieved over 70% precommitment and asking rent is about $2-3 per sq ft per month higher than previous rent. The new OUE Downtown retail podium, OUE Downtown service apartment and Crown Plaza new annex are expected to be completed over the next 2 years. We believe earnings shall significant enhanced upon the AEI completions.

Investment Action

We reiterate our Accumulate rating with new FY14 TP $2.70, pegged to a 30% discount to RNAV. We favour OUE for its strong cash position and possible near term acquisitions. Though the share price may be muted till further visibility of capital redeployment plans, the stock remains attractive with its last closing at $2.35, about 40% discount to our FY14E RNAV $3.86. Potential Catalyst: Acquisitions of accretive investments.

Source: Phillip Securities Research - 3 Mar 2014