OUE Limited - OCBC Investment 2019-02-28: They Sell; We BUY


OUE Limited - They Sell; We BUY

  • 11 S-cents special dividend.
  • In the process of selling assets.
  • P/B gap should narrow.

Dividend bump

  • OUE LIMITED (SGX:LJ3)’s FY18 revenue fell 14.7% to S$642.9m, largely due to lower contribution from the group’s property development arm (68.5% drop in revenue). This was primarily due to lower revenue recognized in FY18 pertaining to the completion of a number of OUE Twin Peak units sold under deferred payment schemes.
  • Hospitality revenue grew 7.5% to S$236.6m as the group enjoyed full year revenue contribution from Oakwood Premier OUE Singapore (opened in June 2017).
  • PATMI saw a drop of 89.4% to S$10.0m, on the back of lower net fair value gains on investment properties, as well as the goodwill impairment relating to the group’s investment in OUE LIPPO HEALTHCARE LTD (SGX:5WA). We deem this set of results to be broadly under expectations.
  • OUE has proposed a special dividend of 11 S-cents. Coupled with the interim and final DPS of 2 S-cents altogether, this gives a yield of 7.8%, based on the closing price on 27 Feb 19. We believe this dividend bump follows from OUE’s divestment of the office components of OUE Downtown to OUE COMMERCIAL REIT (SGX:TS0U), as highlighted previously.

Sell assets, paring down debt

  • Moving forward, we believe that the group should be able to book revenue relating to OUE Twin Peak units under deferred payment schemes of S$280m and S$130m in 2019 and 2020, respectively. Given that Oakwood Premier has obtained its hotel licence in Jan 19, we believe that a possible divestment to OUE HOSPITALITY TRUST (SGX:SK7) could be on the cards this year.
  • In downtown Los Angeles, OUE is looking to divest its US Bank Tower, which is valued at US$650m (as of 31 Dec 18). Assuming a divestment value of ~S$800m, we believe that a special dividend of up to ~19 cents/share in 2019 could materialize.
  • Moving forward, we believe that OUE is actively looking for an opportune time to cash in on some of its investments (e.g. mutual funds, stake in Gemdale) to help par down debt.

What does this all mean?

  • Crucially, we believe that the above-mentioned moves will help the market to re-evaluate the underlying value of OUE’s various assets, and thus narrow the significant discount that OUE trades at (Bloomberg forward P/B of 0.37x).
  • We roll forward our valuations, and raise our fair value slightly from S$2.25 to S$2.32. 

Joseph Ng OCBC Investment Research | https://www.iocbc.com/ 2019-02-28
SGX Stock Analyst Report BUY MAINTAIN BUY 2.32 UP 2.250