OUE Commercial REIT - OCBC Investment 2018-01-09: Sector Tailwinds But Still Cautious

OUE Commercial REIT - OCBC Investment 2018-01-09: Sector Tailwinds But Still Cautious OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Sector Tailwinds But Still Cautious

  • Robust sentiments in the office sector.
  • Renewed focus on OUE Bayfront.
  • Maintain HOLD.

Turning tide in 2017 

  • On the back of a nascent recovery for the office market in Singapore in 2017, we see robust sentiments extending into 2018. According to CBRE, the 4Q17 rental for CBD Grade A office rents is forecasted to come in 8-10% higher YoY, followed by increases of more than 10% in 2018.
  • Similarly, Savills Singapore is forecasting a ~15% increase in 2018 for the average monthly rental value of its AAA office basket, outpacing the 10% forecast rental increase for its overall CBD Grade A basket.

Limited time left for income support 

  • Despite the sector tailwinds, we are cognizant that the expiry of OUE Bayfront’s income support is now within a one year horizon (Jan 2019). 
  • As a recap, this income support involves the sponsor providing a top-up of the gross rental income of the property should it fall below S$14.25m in a quarter, subject to maximum annual and aggregate limits of S$12.0m and S$50.0m, respectively. On a 9M17 basis, the level of income support drawn on is estimated to be ~S$2.3m, which represents an increase of ~11.5% YoY. 
  • Given that OUE Bayfront’s committed office occupancy of 98.2% (as at 30 Sep 2017) is already relatively robust, we think that 2018 will be a year for OUE Commercial REIT (OUECT) to capitalize on the improving market sentiments to establish firmer rental reversions, in order to mitigate the removal of the sponsor’s income support.

Not cheap against historicals 

  • Valuations for OUE Commercial REIT (OUECT) are not particularly cheap at this juncture. While OUECT is currently trading at a 12m blended forward consensus P/B of 0.67x, we note that this is close to one standard deviation above the 3-year mean. 
  • Also, with the recent jump in OUECT's share price of 4.2% on a YTD basis, we note that OUECT’s 12m blended forward consensus dividend yield has now compressed to ~6.4%, which is close to two standard deviations below the 3-year mean.
  • Upside risk to our call would be yield-accretive acquisitions, given that One Raffles Place was OUECT’s last acquisition in late 2015. 
  • We maintain our HOLD rating and fair value estimate of S$0.67.

Joseph Ng OCBC Investment | http://www.ocbcresearch.com/ 2018-01-09
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.670 Same 0.670