OUE Commercial REIT - CIMB Research 2018-03-22: Revitalising One Raffles Place

OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Revitalising One Raffles Place

Planning AEI at One Raffles Place (ORP), bringing in a co-working tenant.
AEI likely to improve shopper circulation.
We do not expect significant frictional vacancy during the AEI period, exercise to be funded by internal resources.
Maintain HOLD and Target Price of S$.0.75.

OUECT announced it is embarking on an asset enhancement initiative (AEI) at One Raffles Place (ORP) shopping mall as part of its efforts to revitalise the mall with a more diverse and dynamic tenant mix.

As part of this exercise, it has secured a co-working space tenant that will occupy 35,000 sq ft of the mall in early 2019. This will further complement the business traffic and synergy of the mall, which currently attracts a high shopper traffic of 1m/mth.

Spaces, a co-working concept by IWG, the world’s leading provider of flexible working solutions, will launch its flagship site in Singapore at ORP. We envisage this Spaces co-working location as a focal point for flexible workspaces given its advantageous location in the heart of Raffles Place. A unique aspect of Spaces will be its ability to host and launch retail and fashion-related events within a mall setting.

While no details have been shared, we see two possible positives from this transaction.
- For one, the AEI would likely help to improve shopper circulation of the mall as well as create more open retail areas with better visibility.
- The other, we think, is the prospect of greater earnings visibility for OUECT through a longer-than-current-average lease term while having a larger single tenant could likely optimise property management resources.
We think there may be potential for some boost in overall space utilisation as well.

OUECT intends to start the enhancement works in mid-2018. To minimise disruptions, the exercise will be done in phases. Hence, we do not anticipate significant frictional vacancy to the current occupancy of 86.4% during the makeover period.
OUECT’s gearing stands at 40.3% post the redemption of CPPUs in Jan 2018. While the AEI capex has not been articulated, management guided it to be funded via internal resources. Hence, we expect gearing to remain close to current levels.

We maintain our HOLD rating and leave our DDM-based Target Price of S$0.75 unchanged pending more details on this enhancement exercise.
OUECT currently offers FY18F DPU yield of 6.3%.
Upside risk to our call would be a faster-than-projected office rental recovery while downside risks include a slow take up of its office space.

LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-03-22

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.750 Same 0.750