Overseas Union Enterprise - Share-financing overhang over (CIMB)

OUTPERFORM Maintained

S$2.14 Target: S$3.01

Mkt.Cap: S$2,101m/US$1,737m

Property Devt & Invt

Lifting of overhang?

Closing share-financing agreement with Credit Suisse. Golden Concord Asia Limited (GCAL), the controlling shareholder of OUE, has announced that it will be closing its share-financing transaction with Credit Suisse, started in Jan 11. With the immediate unwinding of the position, GCAL shall now acquire the remaining 13m OUE shares (1.32% of OUE’s issued capital) from Credit Suisse and relinquish the right of return of the whole lot of 53.3m OUE shares initially delivered to the latter. This deal had caused much confusion in the market and we believe the overhang on OUE’s stock would be lifted. GCAL says it has not entered into other derivative transactions in relation to OUE shares. OUE shares are now on trading halt, but we expect its share price to react positively once the halt is lifted. Maintain earnings forecasts, Outperform rating and target price of S$3.01, still based on a 25% discount to RNAV (S$4.01). We continue to expect catalysts from higher achieved rents and RevPAR, and more acquisitions.

Details

The share-financing structure. To recall, GCAL had delivered 53.3m OUE shares to Credit Suisse in Jan 11 as part of a share-financing deal. GCAL had received around S$136m for 42.6m shares pledged, with the remaining 10+m shares held by Credit Suisse for hedging purposes. Credit Suisse subsequently placed out the 42.6m shares to institutional investors at what we believe to be S$3.35-3.50 apiece. At this point, GCAL’s deemed interest in OUE was unchanged at 67.07%, as it was understood that it would be able to buy back the shares in a certain timeframe.

Closing the position. Details are sketchy, but we estimate that GCAL would probably be in a more advantageous position in unwinding the deal as opposed to doing nothing. As it stands, it would have seemed that GCAL had effectively placed out 42.6m shares (to Credit Suisse) at S$3.35-S$3.50, a level much higher than current share price. This is likely offset by the need to acquire the remaining 13m shares, bulk of which it had already owned, presumably at around current market price (S$2.14).

With the decision to unwind its position, GCAL shall now receive the 13m OUE shares, equivalent to 1.32% of OUE’s issued capital from Credit Suisse. It would also relinquish the right of return of the whole lot of 53.3m OUE shares initially delivered to Credit Suisse. With this closure, GCAL’s direct interest in OUE will be diluted by 4.11% to 62.98% from a deemed interest of 67.07% initially.

Overhang removed? Whatever the case, we believe that closing this position will send out positive signals to the market. The deal had caused much confusion among investors, and it is likely that the recent sell-down of OUE was triggered by fears of potential margin calls on this financing scheme. We believe a big overhang may now be lifted. GCAL says it has not entered into other derivative transactions in relation to OUE shares. Our interactions with management in the past 6-8 months suggest that it has learnt its lesson in entering into derivative structures and has openly declared that it will not do it again.

Valuation and recommendation

Maintain Outperform. OUE shares are now on trading halt, but we expect its share price to react positively once the halt is lifted. Maintain earnings forecasts, Outperform rating and target price of S$3.01, still based on a 25% discount to RNAV (S$4.01).