• Divestment potential
• Valuations unnecessarily depressed
• FV estimate of S$2.25

Lack of Contribution From Property Development

As a recap, OUE’s recent 2Q18 revenue fell 19.6% YoY to S$150.6m, due largely to the absence of contribution from the development property division. Revenue from the group’s hospitality division rose 11.1% YoY to S$54.0m, due to the full quarter contribution from Oakwood Premier OUE Singapore (Oakwood), which opened in June 2017.

Similarly, the group’s investment properties division saw 2Q18 revenue rise 4.2% YoY to S$69.8m, with a full quarter contribution from Downtown Gallery, which opened in May 2017. The group’s healthcare income fell 15.3% YoY to S$9.5m, due to lower revenue recorded by operations in China. All-in, PATMI fell 24.6% YoY to S$5.3m, which was affected by higher finance expenses on higher borrowings.

Divestment of OUE Downtown’s Office a Possibility

As of 30 June 2018, OUE Downtown’s office registered a stable occupancy rate of 95.1% (97% as of end FY17), with passing rents at ~S$7 psf. With the AEI completed and asset stabilized, we believe that OUE Downtown’s offices could be a candidate for divestment to OUE Commercial REIT.

With the potential for healthy rental reversions ahead, improving sentiment in the CBD office market and firm cap rates (as seen from recent transactions involving Twenty Anson and 55 Market Street), we think that it makes sense for OUE to explore capital recycling at this point of the cycle. Separately, we note that Oakwood’s ramp-up has been encouraging, as occupancy has improved from ~40% as of endFY17 to 64% as of 30 June 2018.

The Right Read of the Market

OUE had been cautious in its land bids as the group was concerned about thinning property development margins, even prior to the latest set of property cooling measures. In our opinion, this has turned out to be an astute move. Thus, we do not think that the depressed forward price-to-book multiple of 0.34x, which is a steep discount of 1.5 S.D. below the 5-year mean, is warranted.

Potential capital recycling by the group leading to earnings-accretive acquisitions could be a source of re-rating. We maintain our fair value estimate of S$2.25 for now.

Source: OCBC Research - 6 Sept 2018