OUE Commercial REIT - OCBC Investment 2017-08-03: No Big Surprises In 2Q17

OUE Commercial REIT - OCBC Investment 2017-08-03: No Big Surprises In 2Q17 OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - No Big Surprises In 2Q17

  • 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.

Eli Lee OCBC Investment | http://www.ocbcresearch.com/ 2017-08-03
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.680 Up 0.650