KGI Group Research (KGI) has initiated coverage with an “outperform” call on OUE LJ3 REIT, citing “resilience amid challenging market conditions” as its reason, with a target price of 30.9 cents.
Analyst Alyssa Tee notes that OUE REIT in its 1QFY2024 ended March 31 results reported a revenue of $74.9 million, a 9.5% y-o-y growth, and net property income of $60.5 million, a 6.9% y-o-y growth.
It also secured positive rental reversion of 12.6% in its Singapore offices and achieved a committed occupancy of 97.6% in Mandarin Gallery, what Tee describes as showcasing stability and competitiveness in the market.
With Singapore’s tourism industry expected to see a surge in tourist arrivals driven by concerts and meetings, incentives, conferences and exhibitions (MICE) events, Tee says that the REIT has strategically completed asset enhancement initiatives (AEIs) for its hotels.
She says that this approach has already yielded promising results, with a remarkable 22.7% y-o-y revenue growth to $26.9 million in the hospitality segment. Notably, the surge in revenue per available room (RevPAR) by 23.3% y-o-y to $280 reflects the REIT's ability to capitalise on higher room rates amid strong demand from event attendees and tourists.
In anticipation of an interest rate reduction of 25 basis points in 2024 and ensuing rate cuts, Tee says that the REIT stands to benefit from lower borrowing costs, which will enhance its financial flexibility and potentially drive higher investor interest.
The analyst says that this will position OUE REIT for enhanced profitability and value creation in the coming quarters.
OUE REIT's favourable credit rating from S&P positions it well for refinancing endeavours, evidenced by the successful increase of its initial loan amount from $540 million to $600 million, Tee says.
The additional funds will be used for the early refinancing of existing borrowings due in 2025 and general corporate purposes, she adds.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
The analyst therefore initiates coverage with an “optimistic” recommendation and target price of 30.9 cents, based on their comprehensive valuation model incorporating a terminal growth rate of 2.0% and a cost of equity of 9.7%.
As at 1.40pm units in OUE REIT are trading flat at 27 cents.
