• 3Q18 within expectations
• Remaking OUE
• FV estimate of S$2.25

In-line Numbers

OUE’s 3Q18 numbers were within our expectations. Revenue increased by 0.8% YoY to S$183.3m, with higher contributions from the group’s hospitality and development property divisions, with the latter featuring recognition of revenue of OUE Twin Peaks units sold under the deferred payment scheme.

The group recorded ‘other’ losses of S$13.4m as compared to a gain of S$11.1m in 3Q17, primarily due to a net change in fair value of investments. All considered, PATMI fell sharply by 80.7% YoY to S$2.1m. However, core PATMI came in at S$15.4m (stripping out the effects of FV movements of investments and loss on disposal of interest in subsidiaries), comprising 29.9% of our full-year forecast.

Revisiting the Capital Structure

Following yesterday’s analyst briefing, we noted that management has firm plans to pare down debt, deleveraging from a 68.1% net gearing level (as at 30 Sep 18) to possibly a net cash position within the next 6 months. Of the consolidated pro forma debt (following the divestment of the office components of OUE Downtown), about S$1.7b is attributable to OUE, with the majority of the remainder attributable to OUE Commercial REIT.

In order to attain its target, OUE has ~S$1.2b of liquid assets, with the possibility also to divest of its US Bank Tower, valued at ~S$800m. We understand that management wants to remain nimble in the market, with sufficient dry powder to capture opportunities as they arise, investing in assets with shorter term returns.

What to Do With First REIT?

Moving forward, management is also focused on growing its asset management business, as well as healthcare segment. With an indirect stake in First REIT, we think that management could consider re-evaluating/re-purposing some of First REIT’s older assets, and/or leveraging the platform to bulk up on non-Indonesian assets.

In our view, this should be premised on OUE / OUELH taking over Lippo Karawaci’s remaining 10.6% stake in First REIT. Separately, following the completion of the sale of the office components of OUE Downtown, we believe that a special dividend could potentially be in store. We maintain our fair value of S$2.25 for now.

Source: OCBC Research - 13 Nov 2018