OUE Commercial REIT - DBS Research 2016-11-02: Concerns to weigh on share price

OUE Commercial REIT - DBS Vickers 2016-11-02: Concerns to weigh on share price OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Concerns to weigh on share price

  • 3Q16 DPU of 1.32 Scts (+29% y-o-y) ahead of expectations.
  • Results boosted by contribution from One Raffles Place in October 2015.
  • Underlying organic NPI growth of 8.5% y-o-y.


Impediments to re-rating. 

  • We maintain our HOLD call for OUE Commercial REIT (OUECT) with a revised TP of S$0.74. 
  • While we see long term value in OUECT as it trades at over 20% discount to its book value and offers >7% yield, we believe the stock will be range bound near term, due to its above-average gearing (around 41%), relatively small capitalisation and fears over falling office rents ahead of new office supply in 2017.


Uplift from One Raffles Place (ORP). 

  • With an income support arrangement providing income stability to OUE Bayfront, contributing a third of net property income (NPI) till 2018, earnings upside would come from driving a better performance at ORP. 
  • With initial yield estimated at 3.4%, the Manager is actively seeking to push occupancy rates closer to c.95% from c.91% currently.


Earnings risk possible in FY17. 

  • As OUECT’s proactive forward renewals have reduced the number of leases expiring in FY16, the greatest earnings risk for OUECT is in FY17. There are approximately 16% of leases by net lettable area (NLA) at OUE Bayfront and 26% at ORP that are up for renewal in FY17. 
  • The risk of negative rental reversions arises as rents for these leases were signed during the better times in FY14/15. The potential magnitude of falling rents is still uncertain as it is unclear how aggressive the management of the new office buildings will be in discounting rental rates.


Valuation

  • Given the better-than-expected 3Q16 results, we increased our DCF-based TP to S$0.74 from S$0.73 previously.


Key Risks to Our View

  • The key risk to our view is a greater-than-expected fall in spot Grade A office rents to below S$7 per square foot per month (psf/mth).




Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-11-02
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.74 Up 0.730




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