Share Price S$2.39
Target Price S$3.04
Potential 14% Special Dividend Payout Following The Listing Of OUE C-REIT
A special 1-for-6 distribution-in-specie of OUE H-Trust (or S$0.15 dividend and 6.3% yield) is in sight following the listing of OUE C-REIT. A further 8% dividend payout is a possibility following the example of OUE HT. OUE has established a capital recycling platform to enable the parent to focus on higher-value development activities while simultaneously deriving a stable income stream through its stakes in its trusts and property management platform. Maintain BUY with a lower target price of S$3.04 (from S$3.12), based on a 30% discount to our revised RNAV of S$4.34/share (post 21 cent dividend).
• Successful listing of OUE Commercial REIT (OUE C-REIT) with the REIT closing yesterday at S$0.80, unchanged from the IPO price.
• 6.3% special dividend in sight. OUE has announced a one-for-six distribution in specie of OUE Hospitality Trust (OUE H-Trust), equivalent to S$0.15 dividend or 6.3% yield, contingent on the divestment of OUE Bayfront to OUE Commercial REIT. OUE will retain 33-35% of OUE H-Trust post divestment, down from 45% currently. With the successful divestment and listing, OUE will likely announce the special dividend within the next quarter.
• 4.2% special cash dividend a possibility. OUE could also announce a further special cash dividend of close to S$0.10/share (or 4.2% yield) assuming it distributes 45% of its net cash proceeds from the IPO, following the potential full repayment of existing debt of US$376.6m. This is similar to the special dividend post-listing of OUE Hospitality Trust.
• Another 3-4% yield from potential distribution-in-specie of OUE C-REIT units. In addition, similar to the distribution-in-specie of OUE H-Trust units, OUE may also choose to distribute OUE C-REIT units to enable shareholders to benefit from the ownership and returns from the separate entities. A distribution-in-specie to reduce OUE's current 45- 50% stake in OUE C-REIT to a 35% stake could yield a further 3-4% yield. This distribution is unlikely in the near term due to the six-month lock-up for OUE C-REIT, but could be a medium-term catalyst for OUE.
• OUE has established a capital recycling platform to enable it to focus on highervalue and higher-risk development activities while unlocking capital from stabilized assets through divestment to OUE-managed REITs. Key pipeline properties for OUEmanaged REITs and trusts include OUE Downtown, One Raffles Place and US Bank Tower (for OUE C-REIT), and Crowne Plaza Changi Airport and serviced apartments in OUE Downtown (for OUE H-Trust).
• Deriving a stable income stream through its stakes in its trusts and property management platform. OUE intends to maintain a 33-35% stake in OUE H-Trust post the distribution-in-specie, and also holds a 45-50% stake in OUE C-REIT following the IPO.
• Prefer the parent to the REIT. With the near-term dividend potential, further upside from the completion of the AEI works at OUE's properties, together with the ability to unlock capital upon divestment to its REITs, OUE offers a compelling investment proposition. While OUE C-REIT is poised to benefit from the improving office outlook, investors may see limited rental upside in the near term due to income support for its office rentals at S$11.80psf pm, 14% higher than passing rentals at S$10.40psf pm. In addition, headwinds for OUE C-REIT include a higher gearing of 42.3%, concentration risk with 70% of value from a single property (OUE Bayfront) and a non-investment grade credit rating (one of two REITs) due to limited financial flexibility and short operating history.
• Marginal accretion to RNAV. The divestment price of S$1,005m is S$29.2m (2.9%) above our built-in RNAV estimate of S$975.8m. The divestment would result in a marginal 3-cent accretion to our adjusted RNAV of S$4.34/share, post 21 cents/sharepayout.
• Maintain BUY with a lower target price of S$3.04, pegged at a 30% discount to our RNAV of S$4.34/share. OUE is trading at a deep 45% discount to our RNAV.
SHARE PRICE CATALYST
• Successful completion of asset enhancements in commercial and hospitality properties.
• Acquisition of under-valued assets with redevelopment potential.
Publish date: 28/01/14