OVERSEAS UNION ENTERPRISE - Best Singapore-centric commercial proxy (DMG)

BUY

Price S$2.91

Target S$4.03

Best proxy to Singapore commercial exposure, resume coverage with BUY. With KepLand’s divestment in key assets ORQ and MBFC Phase 1 reducing office exposure to c.34%; we highlight OUE as a key pick for a pure play on Singapore assets, with c.51% of OUE’s RNAV backed by office assets including OUE Bayfront, and 26% hospitality exposure anchored by flagship Mandarin Orchard Hotel. Stock is currently trading at 0.9x P/B and steep discount of 42% to RNAV. We resume coverage of OUE with a target price of S$4.03 based on 20% discount to RNAV, translating to 38% upside.

Twin Peaks shaken, but not stirred. Based on URA caveats showing sales of OUE’s sole development project Twin Peaks trickling to a standstill in 1H11, we think this is a reflection of negative sentiment for high-end projects shaken by the government cooling measures in Jan 11. Despite being one of the key concerns for OUE, we believe OUE is not likely stirred by the slowing sales, given only sale of c.70 units are required to breakeven for this project with sales of 38 units to date.

Visibility in earnings accretion. OUE seeks to maintain 80% as recurring income from its portfolio of commercial and hospitality assets. FY11 earnings are boosted by maiden full year contribution of the DBS Tower acquisition as well as completion of OUE Bayfront in 1Q11, while completion of One Raffles Place Tower 2 in 4Q11 would add to associate earnings in FY12. While sale of Twin Peak’s units are likely to be tepid, any further sales progress would provide a positive surprise to OUE’s earnings performance.

Completes acquisition of Crown Plaza. OUE recently completed the acquisition of Crown Plaza Changi Airport, boosting its stable of >3,000 rooms. There are asset enhancement plans in place for this latest acquisition with the addition of +200 rooms, while in the medium term plans for a retail enhancement to DBS Towers would boost NPI accretion as well as OUE’s RNAV.

Slow moving Twin Peaks. OUE’s sole residential development, high-end project 462 unit Twin Peaks has evidently been affected by the cooling measures announced by the government in Jan 11. However, we believe OUE is unlikely to soften its selling price for the project as based on breakeven of c.S$2,018, it is estimated OUE would only require sales of about c.70 units to breakeven for this project. Moving forward, we believe OUE is likely to be opportunistic in terms of undertaking residential projects as land-banking at reasonable acquisition prices should be challenging at this stage, instead to focus on the commercial and hospitality segment for a stable stream of recurring income. OUE reiterates its stance to maintain 80% of earnings supported by a steady stream of recurring income backed by a quality portfolio of commercial and hospitality assets with a Singapore-centric focus.

Completes acquisition of Crown Plaza Hotel. OUE has just completed the acquisition of 320-rm Crown Plaza Changi Airport hotel for S$299.5m. Asset is currently enjoying c.90% occupancy on the back of demand for its conference facilities given its favourable location with linkage to Changi Airport Terminal 3. According to OUE, there are plans for enhancement for the addition of +200 rms on an adjacent site, translating to approximately $621,000 per key for the asset. Post acquisition, OUE further adds to its portfolio of hospitality assets c.3,000 rms in Singapore and China including flagship asset Mandarin Orchard (1,051 rms).

Enhancement for commercial assets on-going, potential upside for DBS Towers. According to OUE, there are plans in place for an additional 150,000 sf of retail mall post transformation of the auditorium and podium space. Excluding the potential of positive reversions for this asset which we believe is currently under-rented, NPI and in turn capital value for DBS Towers may potentially be boosted by c.40% post completion of enhancement. However we note this is a medium term positive for OUE, with enhancement only expected to commence in 1Q13. With the recent snag for office conversion (Fuji Xerox Towers, CDL; Cecil Court, Carlton Hotel Group), we believe any potential of conversion of DBS Towers to residential development is unlikely in the near term with on-going plans for asset enhancement in place.