OUE Hospitality Trust - OCBC Investment 2018-09-20: Too Cheap To Ignore

OUE HOSPITALITY TRUST SGX:SK7

OUE Hospitality Trust - Too Cheap To Ignore

OUE Hospitality Trust’s (OUEHT) unit price has declined 7.3% since 10 Sept’s close, after the announcement of a related party’s acquisition of OUE Downtown office components through a dilutive rights issue.

We believe OUEHT’s sharp unit price decline was prompted by concerns of an equity fundraising in the near term to fund the acquisition of one of its ROFR assets, Oakwood Premier, the serviced residence component of OUE Downtown.
Note that OUEHT’s gearing stands at 38.7% as at 30 Jun 2018, implying a debt headroom of S$250m up to the regulatory limit of 45%.

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We believe Oakwood Premier, which commenced operations in Jun 2017, has yet to reach optimal occupancy levels and needs more time to stabilize before it is offered for sale. Even if OUEHT does acquire Oakwood Premier, we believe it is more likely to conduct a placement as opposed to a rights issue given the size of the potential acquisition.
We roughly estimate the valuation of Oakwood Premier to be in the range of ~S$1m to S$1.2m on average per key (S$268m to S$322m in aggregate). In any case, current conditions do not seem particularly ripe for equity financing after the recent rout, with OUEHT’s unit price trading below book at ~0.9x FY18F P/B as at 19 Sept’s close.
With these factors in mind, our base case is that OUEHT will not pursue an acquisition of Oakwood Premier in the near-term. While we cannot rule out the possibility that OUEHT could acquire a non-ROFR asset (and conduct a rights issue), we believe there is nothing particularly suggestive of this right now to warrant such a sharp unit price decline.

We do note that OUEHT’s Mandarin Orchard Singapore (MOS) has a high RevPAR base to cross in 3Q18, and that the quarter will be compared to 3Q17 results which included CPCA income support.
On the other hand, 2019 prospects appear bright to us. We believe Crowne Plaza Changi Airport is at the cusp of surpassing its minimum rent and with the opening of the nearby Jewel Changi Airport (expected end-March 2019), we see room for CPCA to contribute beyond this threshold.
As of 19 Sept’s close, OUEHT is trading at 7.3% FY18F yield and 7.5% FY19F yield and we find the REIT to be very attractively valued. We upgrade OUEHT from Hold to BUY with an unchanged fair value of S$0.79.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2018-09-20

SGX Stock Analyst Report BUY Upgrade HOLD 0.790 Same 0.790