• OUE posted lower 3Q14 revenue at S$106.3mn (-10.8% y-y) due to lower residential sales income and sale of China hotels in 3Q13
• PATMI was up 23.1 y-y to S$16.5mn with lower finance expenses and higher contributions from associates and jointly controlled entity
• Focus on AEIs of commercial portfolio to improve earnings
• Maintain Accumulate with revised TP $2.52

What is the news?

OUE announced 3Q14 PAMTI at S$16.5mn, up 23.1% y-y, on back of lower finance costs and higher profits from associates with contribution from the revamped One Raffles Place retail podium which was completed in May this year. Residential development sales recognition remains sluggish with 1 unit of Twin Peak sold in 3Q14. Revenue from Hospitality and Investment Property division also fell 9.9% and 4.1% y-y on account of absence of contributions from (1) China Hotels which were sold off last year and (2) Mandarin Orchard and Mandarin Gallery which are held under the Group associates following the deconsolidation of OUE H-Trust.

How do we view this?

The reported revenue in 9M14 met about 71% of our full year estimates, slightly below our expectations. 9M14 core earnings was S$24.2mn, accounting for 50% of our previous forecast. With the view that the local residential outlook to remain lacklustre and cooling measures to stay, OUE shall focus on enhancing the commercial portfolio to augment recurring income.

OUE has commenced the development of a 10-storey extension building to the iconic Crowne Plaza Changi Airport hotel in Aug 14. Upon completion, the number of rooms will increase by 243, bringing the total number of rooms to 563. The completion date is scheduled at end 2015.

AEIs at OUE Downtown and US Bank Tower observation deck are also in progress. We do see a visible earnings pipeline upcoming, though we reckon that it will be a while for OUE to enjoy the full benefits of the on-going AEIs projects which will be completed in late 2015 to 2016. We foresee the Investment property division will continue to enjoy a good performance into 2015 on back of tight occupancies. However, we rationalise that the rental growth to slow in late 2015 or early 2016 with the upcoming office supply glut in two years.

Investment Actions?

We maintain our Accumulate rating with reduced target price of $2.52, pegged at 30% to our revised RNAV to factor in the lower 9M14 core profits and the anticipated slower rental growth. Valuation remains attractive at 0.51x FY14 P/B.

Source: Phillip Securities Research - 10 Nov 2014