Maiden of Orchard
NOT RATED; S$0.88;
Potential Target * : 12-Month S$ 0.93 (8% upside)
• Premier address along Orchard Road
•Resilient earnings with multiple growth drivers
•Fair value of S$0.93 offers 8% upside
Premier address along Orchard Road. OUE HT is a Singapore-based REIT with an initial portfolio of two properties in prime locations - the 1051-room Mandarin Orchard Hotel, and the accompanying Mandarin Gallery retail mall. The properties are collectively worth S$1.7bn as of 31 Mar13.
Resilient earnings structure with strong visibility. OUE HT derives its rental income through a 15-year master lease structure which comprises of a fixed and variable income component pegged to the underlying performance of Orchard Hotel, while the Mandarin Gallery continues to enjoy robust occupancies of close to 100%. We estimate that close to 66% of its income is backed by fixed rents, which is one of the highest among the Hospitality S-REITs.
Multiple growth drivers. Immediate earnings drivers will come from the Manager optimizing the performance of Mandarin Orchard through a push towards higher yielding segments like the corporate market, an additional 26 new hotel rooms and the phased refurbishment of close to 430 hotel rooms, which should lead to higher RevPAR growth in the medium term. In addition, there is a visible pipeline of acquisitions targets in Singapore and China, which when acquired could potentially double its current number of rooms.
DCF based fair value of S$0.93. We have a DCF-based fair value of S$0.93, based on a WACC of 6.9%, offering potential upside of 8%. Better than expected operational performance and or acquisitions is expected to be re-rating catalysts. In addition, yields of 7.6%-8.0% are higher than S-REIT peers.
Volatile earnings, mitigated by higher fixed rents. While earnings are sensitive to RevPAR changes, we expect earnings volatility to RevPAR changes to be limited given a high % of income pegged to fixed rates.
Publish date: 09/09/13