Analysts from DBS Group Research, Maybank Securities and PhillipCapital have kept their “buy” calls on OUE
OUE REIT reported a distribution per unit (DPU) of 0.93 cents for the six-month period, 11.4% lower y-o-y. Gross revenue for the same period rose by 5.7% y-o-y to $146.7 million.
Maybank analyst Krishna Guha and PhillipCapital analyst Liu Miaomiao have kept their target prices unchanged at 30 cents and $1.41 respectively, while DBS analysts Derek Tan, Tabitha Foo and Geraldine Wong have trimmed their target price to 33 cents from 35 cents previously.
To PhillipCapital’s Liu, OUE REIT’s 1HFY2024 gross revenue was “in line” with expectations, which was driven by “robust” rental reversion. The REIT’s reversions were a positive 11.7% and 28.4% for its office and retail segments respectively. The REIT’s hospitality segment also saw a revenue increase of 12.9% y-o-y to $51.7 million.
However, the REIT’s net property income (NPI) fell slightly short of Liu’s estimates, forming 48% of her FY2024 forecast.
OUE REIT’s DPU also came under, forming 46% of Liu’s FY2024 estimates.
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“This weakness was attributed to the rising financing costs (+18.5% y-o-y), higher retention of earnings for working capital (+67% y-o-y to $5 million), and the payment of 100% base management fees in cash (65% in 1HFY2023),” she writes in her July 26 report.
As a result, the analyst has lowered her DPU estimates by 10% to factor in the higher base management fees and proceeds released from the divestment of OUE Bayfront to top up the distributions. She sees its DPU remaining stagnant in the 2HFY2024 before picking up in FY2025, reflecting the “fading headwind” from financing costs in the coming year.
Liu also expects OUE REIT’s FY2024 earnings to be supported by the high single-digit rental reversion for both its retail and office segments.
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The team at DBS have also lowered their DPU estimates by 16% for FY2024 and FY2025 as the REIT’s 1HFY2024 DPU came in slightly lower-than-expected. The analysts’ new estimates will account for the management fees paid in cash versus units previously as well as to align the team’s margin assumptions with OUE REIT’s performance for the 1HFY2024.
However, the team notes that the REIT’s underlying operational performance was “resilient” with commercial reversions in excess of 12% to 30%.
The recovery of OUE REIT’s hospitality segment also came in ahead of expectations, with hotel revenue per available rooms (RevPARs) rising to new highs and steady growth momentum anticipated in the 2HFY2024.
The analysts note that OUE REIT’s Hilton Singapore Orchard is currently operating at full capacity with more than 1,000 rooms, reporting a 1.83% y-o-y rise in RevPAR to $291 per night.
Crowne Plaza Changi Airport also saw an approximate increase of 11% y-o-y in RevPAR, standing at $228 per night, which was in line with the analysts’ projections.
They add that with the completion of the REIT’s asset enhancement initiative (AEI) at Crowne Plaza Changi Airport in early 2024, earnings for OUE will continue to be boosted.
“The hotel division’s 2HFY2024 performance will likely remain stable, with the upcoming Formula One and concerts line-up,” write the analysts.
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Meanwhile, Maybank’s Guha likes OUE REIT for its “resilient” commercial sector.
He notes that revenue from the REIT’s commercial properties was up 2.2% y-o-y, with Singapore office occupancy increasing 0.1% q-o-q to 95.2%.
OUE REIT’s Mandarin Gallery saw higher occupancy levels of 98.3%, alongside a “robust” 28.4% in rent reversion.
The analyst adds: “Office is likely to generate positive reversion though some large renewals may see result in frictional vacancies. Retail is steady, though rent reversion will normalize.”
However, he adds that the REIT’s overseas assets such as Lippo Plaza Shanghai remains challenging resulting from a high supply and a decline in passing rent.
Guha, like his peers, has lowered his DPU estimates by 3.4% for FY2024 after factoring in lower payouts and management fees in cash.
That said, the analyst remains positive on the REIT due to its inexpensive valuation.
CGS International keeps ‘hold’ call with unchanged target price
CGS International (CGSI) analysts Lock Mun Yee and Natalie Ong have kept their “hold” call on OUE REIT, the only brokerage to do so here, as they see limited near-term target price upside. The analysts have kept their target price unchanged at 30 cents.
Unlike their peers, Lock and Ong have also kept their DPU estimates for the FY2024 to FY2026 unchanged as OUE REIT’s 1HFY2024 DPU stood “broadly in line” at 45.6% of their FY2024 forecast.
Despite higher financing costs, the analysts note the REIT’s stable gearing which stood at 38.7% as at end-1HFY2024.
The REIT’s cost of debt rose to 4.7% with its adjusted interest coverage ratio (ICR) dipping to 2.2 times.
That said, they note that the REIT has completed most of its FY2024 debt refinancing in May and June, with the issuance of $600 million of unsecured sustainability-linked loans and $250 million of investment grade green notes.
The analysts say: “In terms of growth strategies, management said it targets to grow hospitality segment revenue from the current 32.5% to 40% of total revenue in the medium term.”
“In terms of geographical expansion, management said Australia and Hong Kong were possibilities given recent declines in capital values,” they conclude.
At its share price of 29 cents as at Lock and Ong’s report dated July 25, OUE REIT has an “attractive” dividend yield of 7%.
As at 11.55am, shares in OUE REIT are trading at 0.5 cents lower or down 1.75% at 28 cents.
