OUE HOSPITALITY TRUST (SGX:SK7)
OUE Hospitality Trust - Proposed Merger; Accept Offer
TAKE PROFIT (previously Buy) and accept offer.
- OUE COMMERCIAL REIT (OUECT, SGX:TS0U)’s proposed merger offer is fair, in our view, as the effective offer price is close to our adjusted fair value. With room for upside from a larger diversified asset base, cost savings and inorganic growth potential, we recommend investors to accept offer.
- Investors seeking a pure-play on hospitality should TAKE PROFIT and switch to CDL HOSPITALITY TRUSTS (SGX:J85) (Rating: BUY, Target Price: SGD1.80, see report: CDL Hospitality Trusts - Turnaround In Sight, Our Top Pick; BUY).
Summary of transaction.
- The acquisition will be by way of scheme consideration and will be satisfied by SGD0.04075 in cash and 1.3583 new OUECT units per OUE HOSPITALITY TRUST (OUEHT, SGX:SK7) share. The offer translates to SGD0.747/share (based on OUECT’s closing price of SGD0.52), representing a 2% premium to OUEHT’s last traded price.
- The deal, subject to approval from the court and unitholders (for both REITs), is expected to be completed by 3Q19. Upon the completion of the merger, OUEHT will be delisted from the Singapore Exchange. Post-merger, OUE LIMITED (SGX:LJ3) will remain as the sponsor and major shareholder, with a 48% stake in the combined entity.
Key merits.
- The transaction is accretive to OUEHT’s pro-forma (FY18) DPU and NAV (See Figures 3-4 in attached PDF report).
- Besides being yield-accretive, the deal aims to benefit from: larger free float and liquidity which can result in potential index inclusions, tenant and asset class diversification, operational cost savings, potential lowering of funding costs and better inorganic growth potential. The combined entity will have total assets of SGD6.8bn, making it the eighth largest S-REIT by asset size and third largest among the diversified S-REITs.
Offer price is fair.
- The effective offer price is at par with OUEHT’s latest NAV (FY18) and in line with the hospitality REITs’ average 1x P/BV. There is room for upside potential as demand-supply dynamics are favourable for both Singapore office and hospitality segments.
- The combined entity also has better inorganic growth potential from a larger balance sheet, as well as the ability to acquire a wider pool of assets, ie mixed developments (commercial and hospitality assets).
More M&A in REITs space likely.
- The limited acquisition options in the local market, favourable REIT market conditions along with REIT managers’ aspiration to grow big to better compete with larger REITs has resulted in increasing M&A interest in the S-REIT space recently. The trend is likely to continue, with more smaller REITs feeling the pressure.
- We see merger opportunities in the industrial REITs and hospitality REITs space, which has a larger proportion of smaller REITs (ie < USD 1bn market cap).
DPU adjustments.
- We fine-tune FY19-21F DPU by -2 to -3% by imputing lower revenue per available room growth for Mandarin Orchard Singapore (MOS), and revise our fair value to SGD0.76 (previously SGD0.77).
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2019-04-09
SGX Stock
Analyst Report
0.76
DOWN
0.770
