OUE C-REIT – CIMB

Riding the wave

OUE Commercial REIT’s (OUE CREIT) 2Q14 results were in line with expectations, with 2Q14 DPU accounting for 27% of our full-year forecast. Given that the REIT has room for further growth and its relatively attractive valuations, we maintain our Add rating, with a higher DDM-based (discount rate: 7.6%) target price of S$0.93 as we roll forward our valuation to FY15 earnings.

Stable portfolio

OUE CREIT reported a stable quarter of earnings and achieved positive rental reversion of 6.1% for OUE Bayfront (OUEB) and 4.3% Lippo Plaza (LP), lifting the passing rent at these properties to S$10.66 psf/mth and Rmb9.11 psm/day. During the quarter, occupancy for OUEB remained full while LP registered a slight dip in occupancy to 93.6% as some tenants did not renew their leases. However, management guided that as at July, occupancy at LP has crept back to >94% and it is confident that occupancy will exceed 95% by year end.

Continues riding the rental growth in Singapore

With Singapore’s office market maintaining its rental growth (+3.4% yoy in 2Q14), we expect OUE CREIT to continue riding this upward cycle, particularly with 23.7% (by gross rental income) of its leases due in FY15. In addition, with the recent committed rents at OUEB varying between S$11.50 and S$15.20 psf/mth, we remain confident that a blended gross supported rent of c.S$11.80 psf/mth is achievable before 2018. On the other hand, we expect rental growth in the Puxi area of Shanghai to remain subdued due to the impending office supply. However, with the locality of LP and the fact that leases in this property tend to be popular among tenants that require a smaller floor area, we believe LP will be able to maintain a high occupancy through FY15 as the market digests the new supply.

Maintain Add

The stock is currently trading at 6.4%/6.5% of FY14/15 dividend yield and 0.8x FY14 P/BV vs. its peers’ valuations of 5.7%/6.0% and 0.9x P/BV. In view of this, and its stability and room for growth via positive rental reversions for OUEB, we maintain our Add rating, with a higher TP of S$0.93.