CGS-CIMB maintains 'hold' on OUE C-REIT and TP of 36 cents citing lack of near-term catalysts

The REIT’s DPU of 1.05 cents for 1HFY2023, down 2.8% y-o-y, was in line with 49.5% of the brokerage's full-year forecast.

Analysts from CGS-CIMB Research have kept their “hold” recommendation on OUE Commercial REIT (OUE C-REIT) TS0U with an unchanged target price of 36 cents after the REIT’s 1HFY2023 ended June 30 results.

In their report dated July 28, Lock Mun Yee and Natalie Ong say that the REIT’s distribution per unit (DPU) of 1.05 cents for the six-month period, down 2.8% y-o-y, was in line with 49.5% of their full-year FY2023 forecast.

For the period, OUE C-REIT reported a 19.8% increase in revenue to $138.8 million while net property income (NPI) increased 23.1% y-o-y to $115.3 milion, led by a strong 35.8% y-o-y improvement in hospitality revenue to $45.8 million. Commercial rental revenue also rose 13.3% y-o-y to $93 million in 1HFY2023.

However, the analysts note that 1HFY2023 distributable income fell 3.3% y-o-y to $57.6 million due to higher finance costs and an absence of income support for OUE Downtown.

The REIT’s Singapore office portfolio continued to show positive rent renewals during the period even as committed occupancy dipped 0.6% to 96.1% at end-2QFY2023. During the quarter, OUE C-REIT recorded positive rental reversion of 8.1%, bringing average passing office rent to $10.22 per sqft.

“Although market rents are stabilising due to a slower macro outlook, we anticipate that OUE C-REIT should still enjoy moderate, but positive rental reversion for the remainder of FY2023,” say the analysts.

Meanwhile, Mandarin Gallery’s committed occupancy rose 1.6 percentage points q-o-q to 98%, with rental reversion growing by 5.5% in 2QFY2023. Shopper traffic recovered to 98% of pre-Covid levels and tenant sales to 83% in 1HFY2023.

For Shanghai Lippo Plaza, the REIT adopted an occupancy strategy and successfully boosted office committed take-up by 11.4 percentage points q-o-q to 86.6% in 2QFY2023, but saw average passing rent decline by 2.4% q-o-q.

During the half-year period, OUE C-REIT’s hospitality segment also benefited from higher room rates as revenue per available room (RevPAR) increased 34.3% y-o-y to $232. Hilton Orchard Singapore’s RevPAR exceeded pre-Covid levels, in part due to its successful rebranding and the management’s focus on driving room rates as part of its yield management strategy, while Crown Plaza Changi Airport reported a 56% surge in RevPAR to $207, say Lock and Ong.

They add that the REIT remains upbeat on the outlook for the hospitality sector, given the numerous meetings, incentives, conferences and exhibitions (MICE) and other events scheduled to be held in Singapore from 2H2023 to 1H2024.

Meanwhile, OUE C-REIT’s gearing has remained stable q-o-q, with aggregate leverage staying at 39.1% as at end-1HFY2023. The analysts note that the REIT’s average cost of debt rose q-o-q to 4.1%, with 68.2% of its interest cost hedged to fixed rates, as its adjusted interest coverage ratio dipped to 2.3x during the period.

“With the sharp improvement in its hospitality business, OUE C-REIT anticipates that this ratio should improve going forward. While OUECT sees possible inorganic growth opportunities in the medium-term as cap rates expand, management remains selective on potential opportunities given the still-high interest rate environment,” say Lock and Ong.

As such, the CGS-CIMB analysts have kept FY2023 to FY2025 DPU estimates unchanged and have retained their dividend discount model (DDM) based target price unchanged at 36 cents. Given the lack of near-term catalysts, they believe the REIT’s share price will likely be supported by an attractive dividend yield of 6.7%.

Their upside risks include accretive acquisitions and divestments and strong office and retail rental growth, while downside risks include lower-than-forecast leisure and corporate travel demand and weak rental growth.

As at 12.49pm, units in OUE C-REIT were trading 1 cent or 3.23% down at 30 cents.

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