SINGAPORE (April 10): DBS Vickers Securities is highlighting myriad benefits to the proposed merger of OUE Hospitality Trust (OUE HT) and OUE Commercial Trust (OUE CT), but also cautions of “potential impediments” post the merger.
The research house has “buy” calls on both trusts with the respective target prices of 85 cents and 60 cents.
In a Wednesday report, analyst Mervyn Song says the proposed combination of both trusts is a bold step but potentially a necessary one, especially in an era where “big is beautiful” among the Singapore listed REITs.
See: Why 'bigger is better' could apply to the proposed OUE merger
“In our view, a larger and more liquid OUECT HT will likely place it on the radar of a wider pool of institutional investors and potentially result in greater broker coverage. Assuming investors are convinced about the merits of the merger; the manager delivers on its growth strategies; and OUECT HT entity gains inclusion to various indexes, a virtuous positive cycle could result in a lower cost of capital over time,” says Song.
Based on the merger terms, Song estimates that OUE HT unitholders will be effectively receiving 1.43 OUE CT shares for each OUE HT unit they own.
Aside from increased DPU post the merger deal, the analyst says unitholders should also expect to benefit from a more diversified earnings base and exposure to the office and hospitality subsectors in Singapore, which he notes are both on a multi-year cyclical uptrend.
Further medium-term upside may be found in potential cost synergies from the enlarged entity, he adds.
Nonetheless, Song says the enlarged entity will also mean the higher gearing may lead to equity raisings that may create an overhang on the stock – especially in the absence of material compression of the enlarged trust’s yield.
“As OUE CT HT will be the first REIT with a mixture of predominantly office and hotel assets, it is uncertain whether the market would be drawn to such an asset mix considering that most investors generally prefer a REIT that is focused on a particular property sub-asset class,” notes Song.
“In addition, the yet-to-be-exercised convertible perpetual preferred units held by the sponsor, and potential injection of OUE Bayfront Oakwood serviced residences, which at this point is unlikely to be accretive, remains an overhang which the merger has not fully resolved,” he adds.
As at 11:07am, units in OUE HT and OUE CT are trading at 72 cents and 51 cents, respectively.
