OUE Commercial REIT - CGS-CIMB Research 2019-01-30: Brightening Prospects

OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - Brightening Prospects

OUECT's 4Q/FY18 DPU of 0.75 Scts/4.38 Scts was slightly below our estimate at 20.5%/95.2% of our FY18 forecast.
Positive rental reversion across the portfolio, in tandem with the office rental upcycle.
Maintain HOLD with a Target Price of S$0.57.

OUE COMMERCIAL REIT (SGX:TS0U, OUECT) reported 9.2%/5.6% improvements in 4Q18 revenue and NPI, respectively, thanks to the inclusion of 2 months of contributions from OUE Downtown office, as well as organic improvements within its existing portfolio. DPU of 0.75 Scts was 34.2% lower y-o-y but would have been 21% higher y-o-y on a rights-adjusted comparison basis.
For FY18, DPU of 3.48 Scts was 3.6% lower y-o-y on a rights-adjusted basis.
Results were slightly below our expectations, at 95.2% of our FY18 forecast.

The bright spot in the results were positive rental reversions achieved across OUECT’s portfolio in 4Q18, in tandem with the office rental upcycle.
OUE Bayfront (OUEB) saw lease expiries committed at between S$11.50-14.20psf, bringing its average passing rent to S$11.60psf from S$11.50psf a quarter ago. Meanwhile, average passing rent for One Raffles Place (ORP) stabilised at S$9.45psf. This offset a slight q-o-q downtick in committed portfolio occupancy of 94.7% due to lower occupancy at Lippo Plaza of 90.1%.

Lippo Plaza (LP) in Shanghai saw its average passing rent dip slightly q-o-q to Rmb9.81psm/day while overall occupancy declined due mainly to the departure of a retail tenant in 2Q18.
With committed rent close to expiring rental level in 4Q and given the slower Chinese economy and large incoming supply of new office space in Shanghai in 2019, we anticipate income growth to moderate for this property in the near term.

Post its annual portfolio revaluation exercise at end-FY18, gearing has declined to 39.3% from 41.4% a quarter ago. 76.4% of its borrowings are on fixed rates and there is no refinancing need for FY19.

We leave our FY19-20F DPU estimates largely unchanged and introduce our FY21F projections. Accordingly our DDM-based Target Price remains at S$0.57.
We maintain our HOLD rating despite the significant upside as we await clarity on the treatment of the CPPUs post the restriction period, towards the end of this year.
Downside risks include potential dilutive new acquisitions or slowdown in the Singapore office rental market.
Upside risks are clarity on the treatment of its CPPUs and faster-than-expected spot office rent recovery.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-30

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.570 SAME 0.570