• OUE’s 1Q14 PATMI soared to $945.6mn (>100% increase y-y) with the gain from unlocking the values of Mandarin Orchard Singapore (MOS) and Mandarin Gallery (MG).
• Recorded revenue at $106.9mn, an increase of 1.5% y-y and gross profit at $60.4mn, an increase of 9.4% due to higher rental revenue with contribution from Lippo Plaza property and US Bank Tower.
• A cash war chest of $846.6mn after divestment of OUE Bayfront to OUE C REIT
• Maintain Accumulate with revised TP $2.59

What is the news?

OUE reported PAMTI of $945.6mn, reflecting an increase of more than 100% as compared to 1Q13. This is mainly attributed to net fair value gain in Lippo Plaza property and gain from unlocking the values of MOS and MG, offset by foreseeable loss on development project Twin Peaks. The revenue was reported at $106.9mn (+1.5% y-y) with higher rental contribution with additions of Lippo Plaza property and US Bank Tower. Hospitality Division accounted for 50% of the revenue, followed by the Investment Property Division at 41%. OUE H Trust was deconsolidated with OUE’s reduced effective stake to 33% following the distribution in specie of OUE H Trust in 1Q14.

How we view this

Armed with a strong cash holding, OUE has announced plans earlier to form a JV with Lippo Limited and Caesers Entertainment Corporation to develop hotels in an integrated entertainment resort in South Korea, scheduled to be completed in FY18. The whole project cost is estimated at S$1bn and OUE will have a significant non-controlling interest in the project. At the moment, approval is still at preliminary stage, pending for more updates. We feel that while this investment is not immediate earning accretive due to the long gestation period, it will value-add to OUE portfolio in long term.

In our view, the Hospitality Division shall remain resilient despite the challenging environment of upcoming new hotel supply while Investment Property Division will continue to pose good performance with positive office demand remain sustainable in FY14.

We believe OUE will continue to seek for higher-value development activities either via investments or AEIs (such as conversion of partial US Bank Tower to residential units for sale and conversion of 1 tower of Twin Peaks to rented apartment services) while unlocking capital from stabilised assets through divestment to OUE-managed REITs and build the fund management business platform. Once the series of on-going AEIs are completed in FY2015 and FY2016, the bottom-line shall improve with better returns.

Investment Action

Maintain Accumulate rating with a reduced target price at $2.59, pegged at a discount of 30% to our revised RNAV from $3.86 to $3.70 to factor in the special share dividend payout. Trading at about 40% to RNAV, the valuation remains attractive.

Source: Phillip Securities Research - 14 May 2014