• OUE’s 2Q14 results posted revenue at S$100mn, (-10.6% yoy) and PATMI at $4.4mn (-70% yoy) due to mainly lower contributions from the Development Property division, higher cost of sales and lower effective stake of OUE HT
• Revamp of One Raffles Place Shopping Mall completed
• Proposed an interim dividend of 1 cent per share.
• Maintain Accumulate with revised TP $2.61

What is the news?

OUE reported 2Q14 revenue of S$100mn which was 10.6% lower yoy due mainly to lower contribution from the Hospitality (after disposal of 2 China Hotels) and Development Property divisions, offset partially by increased contribution from the Property Investment division (up 25% to $37.3 million due to the inclusion of revenue from Lippo Plaza). The earnings before interest and tax decreased 15.8% yoy to S$32.8 million and net profit declined 70% yoy to S$4.4 mn with higher cost of sales (up 12% mainly due to the recognition of rental expense to OUE Hospitality Trust) and lower stake held in OUE HT. The management proposed an interim dividend of 1 cent per share.

How we view this

Overall, the reported revenue in 1H14 met about 47% of our full year estimates. However, bottom line was lower than our expectations due to higher-thanestimated cost of sales. However, net profit for the 2H14 should improve with lower finances expenses since OUE had repaid over $300mn of borrowings this quarter and maiden contributions from ORP retail podium which was reopened this quarter after the revamp.

ORP after revamp - One Raffles Place (ORP) retail podium has reopened in May with a new façade. Upon completion of the AEI, the retail podium now enjoys a net leasable area of 98500 sq ft spread over six levels and has achieved a committed occupancy rate of about 92%, featuring 100 stores with international fashion brands such as H&M, Victoria’s Secret and Uniqlo. Currently, we estimated about 90% of the stores are in operations and balance tenants will progressively move in. Conveniently located above Raffles Place MRT, the mall will attract the catchment of the working professionals and tourists thanks to the increasing office space and hotel projects in the vicinity.

Investment Action

With the view that the local residential market will continue to be challenging and government is unlikely to lift the cooling measures soon, OUE will focus on improving the recurring income of the investment properties and hotels. OUE currently trades at 0.57x FY14 P/B and a discount of >35% to FY14 RNAV, which we feel there is still potential upward movement for the share price. We maintain Accumulate rating with a raised target price at $2.61, pegged at a discount of 30% to our RNAV of $3.73 after marking to market the OUE HT and OUE commercial REIT stake in our valuation. Key upsides: Recycling of capital by divesting stabilized assets to REIT platforms and JV Korea project which OUE is estimated to hold 40% effective stake for property developments.

Source: Phillip Securities Research - 5 Aug 2014