Maybank Securities analyst Krishna Guha has initiated a “buy” call on OUE LJ3 REIT with a target price of 30 cents. His target price is based on a cost of equity of 7.4% and medium-term growth rate of 2%, implying total return of 20%.
The REIT is one of the largest diversified Singapore REITs (S-REITs) with total assets under management (AUM) of $6.3 billion as at the end of FY2023 ended Dec 31, 2023. The REIT currently owns hotels, offices and a mall in Singapore and another in Shanghai comprising 1,655 hotel keys and 2.2 million sq ft of prime office and retail space.
In Guha’s view, OUE REIT is “too cheap to ignore”. At its last-traded unit price of 29 cents, OUE REIT is the “most inexpensive Singapore-centric commercial S-REIT”, says the analyst in his July 15 report.
At present, the REIT trades at a yield of 7.5%, close to 1 standard deviation (s.d.) away from its historical mean of 6.9%. On a price-to-book (P/B) metric, OUE REIT offers a 57% discount versus a historical discount of 35%.
Relative to its S-REIT peers, including commercial REITs, OUE REIT offers the highest yield, steepest discount to book and the highest implied cap rate of 6.2%, notes Guha. The peer average for these metrics are a yield of 6.7%, discount to book of 30% and an implied cap rate of 4.6%.
To Guha, the REIT’s Singapore-focused portfolio and central business district (CBD) Grade A offices, master lease structure, as well as blue-chip tenants offer resilience, while its hotels should see higher revenue from continued growth in revenue per available room (RevPAR).
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Occupancy for its Singapore CBD offices also remains high despite the slowdown in spot rent growth, which should further provide stability, Guha adds.
Other positive factors in Guha’s book, is the group’s increased proportion of unsecured borrowings and lowered financing spreads, as well as the REIT’s investment grade credit rating of BBB- by S&P last year. OUE REIT also has sustainable financing, which makes up 90% of its total debt.
For FY2024, FY2025 and FY2026, the analyst has forecast a distribution per unit (DPU) of 2 cents, 2.22 cents and 2.3 cents respectively. The estimate represents a compound annual growth rate (CAGR) of 2.7% from FY2023 to FY2026.
As at 11.17am, units in OUE REIT are trading 1 cent lower or 3.45% down at 28 cents.
