• FV loss on investment weighs on 1Q18
• Hospitality + Office still a good combination
• FV estimate of S$2.25

Mark-to-market Loss on Investment

OUE’s 1Q18 revenue dropped 26% YoY to S$145.6m, due mainly from the absence of contribution from the group’s development property division, as OUE Twin Peaks was fully sold in October 2017. The group saw revenue from its investment properties division grow by 2.2% YoY to S$69.5m, largely due to rental contribution from Downtown Gallery which opened in May 2017.

Hospitality income saw a healthy growth of 13.5% YoY to S$59.0m, on the back of better operating performance from both Mandarin Orchard Singapore and Crowne Plaza Changi Airport, alongside contribution from Oakwood Premier, which opened in June 2017.

The group recorded a S$8.1m non-cash markedto-market fair value loss on the investment in a mutual fund, which weighed significantly on the bottom-line. 1Q18 PATMI dropped 91% YoY to S$1.0m; we deem this set of results to be below our expectations.

Various Sector Tailwinds Intact

We believe our thesis regarding the group’s favourable position in this part of the cycle across various sectors remains intact. On the hospitality front, the group’s assets should benefit from the return of large biennial events in Singapore, as we generally expect industry-wide RevPAR growth to accelerate further in the coming quarters.

The group’s office assets are also well-positioned to ride on the general uptick in spot rents. According to CBRE, Grade A Core CBD rents rose 3.2% QoQ in 1Q18 to S$9.70 psf per month, marking the third consecutive quarter of growth. As seen from OUE Commercial REIT’s (OUECT) results, negative reversions are starting to narrow, and we expect that momentum to continue into the rest of this year.

As of 11 May 2018, OUE is trading at FY18F P/B of 0.4x, which is ~0.9 S.D. below its 5-year mean. We adjust our model to incorporate our latest FV estimate for OUECT and market price of OUE Lippo Healthcare. As such, our FV estimate for OUE dips slightly from S$2.28 to S$2.25.

Source: OCBC Research - 14 May 2018