• Lower 2Q17 DPU with enlarged unit base
• Portfolio occupancy at 96.4%
• Higher fair value of S$0.68

In-line Set of Results

OUECT’s revenue fell 3.2% YoY to S$44.2m on the back of lower one-off income recognized during the quarter. The amount available for distribution grew 0.6% YoY to S$17.8m, aided by reduced borrowing costs following the partial prepayment of loans from the private placement proceeds in March 2017.

With an enlarged unit base, DPU fell 15.4% YoY to 1.15 S cents, though DPU would have been flat on a pro forma basis. Portfolio occupancy was healthy at 96.4%.

Looking at OUECT’s 1HFY17 results, revenue rose 0.5% to S$89.0m and formed 49.6% of our FY17 projection. DPU of 2.38 S-cents represented a decline of 11.2% (-1.2% on a pro forma basis) and accounted for 53.7% of our full year forecast.

Encouraging Performance by Lippo Plaza

Average passing rents for OUE Bayfront and One Raffles Place as at June 2017 dropped by ~2.1% and ~0.7% QoQ to S$11.42/psf and S$10.14/psf, respectively. This was unsurprising, given that current market rents are lower than that in 2014, when most of OUECT’s Singapore leases expiring in 2017 were committed. In China, Lippo Plaza turned in a good performance, achieving 100% committed office occupancy as at 30 June 2017, representing a 4.2 ppt QoQ growth. The average passing rent in June 2017 was RMB 9.84 psm/day, which was a touch lower than last quarter.

Maintain HOLD

Looking ahead, we believe that greater demand for office space in Singapore should begin to become apparent. We note that existing tenants at One Raffles Place have started to increase their space requirements, while we believe that rents at OUE Bayfront should start to bottom. Given better prospects for OUECT’s Singapore assets, which comprises ~83.5% of the entire portfolio (as at 31 Dec 2016), we lower our cost of equity from 9.7% to 8.1% and fine-tune our assumptions, resulting in our DDM fair value increasing from S$0.65 to S$0.68.

Accretive acquisitions would be a key upside to our forecast, but we deem such developments to be unlikely for now. Based on our projections, OUECT is trading at FY17F distribution yield of 6.4% and P/B ratio of 0.83x. Maintain HOLD.

Source: OCBC Research - 3 Aug 2017