OUE Commercial REIT - CGS-CIMB Research 2019-11-14: A Bigger Platform Post Merger


OUE Commercial REIT - A Bigger Platform Post Merger

  • OUE Commercial REIT's 3Q19 DPU of 0.79 Scts is in line, at 25% of our post-merger FY19F forecast.
  • Positive asset performance across the board; outlook remains robust.
  • Maintain HOLD with a lower Target Price of S$0.57.

Maiden post-merger results

Commercial segment enjoying positive reversions

  • OUE Commercial REIT's 3Q commercial revenue/NPI of S$55.8m/S$43.2m were 35.5%/33.6% higher y-o-y due to contributions from Mandarin Gallery, OUE Downtown (acquired in Nov 18) and organic growth from positive rental reversion across its Singapore office portfolio. Average passing rents for its Singapore office properties ticked up 0.5-0.8% q-o-q while Mandarin Gallery saw a 1.1% q-o-q uptick in average rents.
  • While Lippo Plaza’s committed occupancy improved q-o-q to 92.1%, average passing rent slipped 1.1% q-o-q to Rmb9.75psm/day. OUE Commercial REIT has a remaining 2.3% and 23.9% of commercial rental income to be renewed in 4QFY19F and FY20F, respectively, largely from ORP and OUE Downtown office, thus enabling the trust to leverage on the still-positive reversion cycle.

Hospitality segment boosted by Crowne Plaza Changi

  • The hospitality segment contributed S47.5m/S$6.85m of revenue/NPI in 3Q, aided by a 3.3% y-o-y revenue per available room (RevPar) growth, mainly from Crowne Plaza Changi Airport (CPCA) due to increased passenger traffic and additional attractions at the Changi Airport. We expect the outlook for the hospitality division to be boosted by the limited new room supply and biennial events in 2020.

Slightly higher gearing but interest cover remains healthy

  • Post-merger, OUE Commercial REIT’s gearing rose slightly to 40.5% as at end-3Q19, with interest cover remaining at a stable 3.1x. Average interest cost was at 3.5%, with c.73.4% of its borrowings on fixed rates, thus largely mitigating the trust from interest rate fluctuations.
  • OUE Commercial REIT has c.21% of its debts due to be refinanced in FY20F.

Maintain HOLD

  • We adjust our model to factor in the effect of its merger with OUE Hospitality Trust. Also, we now assume that the outstanding S$375m CPPUs are not converted over FY19-21F but remain in perpetuity at 1% coupon.
  • Overall, our FY19-21F DPU estimates are lowered by 0.8-8.7% and DDM-based Target Price tweaked down to S$0.57. See OUE Commercial REIT Share Price; OUE Commercial REIT Target Price.
  • We maintain our HOLD rating as we believe OUE Commercial REIT would likely need to digest the merger exercise and expansion in units base in the near term. Downside risks include slowdown in Singapore office market recovery while upside risk could come from stronger-than-expected asset performance.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-14
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.57 DOWN 0.610