OUE Under-Value Promising Stock

OUE Limited (“OUE” or the “Group”) announced a net profit of S$1.0 billion for the three months ended 31 March 2014 (“Q1 2014”), reflecting more than 100% increase from S$2.0 million for the same quarter in the previous financial period (“Q1 2013”).

This increase is largely due to a recognition of net fair value gain on Lippo Plaza property which amounted to S$114.8 million, as well as the gain amounting to S$986.4 million, resulting from unlocking the values of Mandarin Orchard Singapore and Mandarin Gallery, which had been disposed to OUE Hospitality Trust (“OUE H-TRUST”). OUE H-TRUST was deconsolidated as a result of a reduction in the Group’s effective interest subsequent to a distribution in specie made to shareholders in Q1 2014. OUE H-TRUST is an associate of the Group as at 31 March 2014. The above gains are offset by an allowance for foreseeable loss of S$105.0 million provided on Twin Peaks based on the latest valuation obtained.

Dr. Stephen Riady, OUE’s Executive Chairman said, “We are pleased with our results this quarter as we are now realising the returns from our portfolio of properties. With the refurbishment work in the retail mall at One Raffles Place near completion and asset enhancement works at OUE Downtown being on track, we are well positioned to benefit from further strengthening of our recurrent income streams.”
”Together with our healthy cash balance of S$864.6 million, we are well-placed to seize opportunities that will be value-enhancing for OUE’s continuous growth”, added by Dr. Riady.

OUE 1Q2014: EPS = 103.95 cts - NAV = $4.06 - Latest Share Price = S$2.27

With the refurbishment work in the retail mall at One Raffles Place near completion and asset enhancement works at OUE Downtown being on track, OUE is positioned to benefit from further strengthening of recurrent income streams.”

OUE share price @ S$2.27 over NAV @ S$4.06, discount of 78.85% is an under-value stock. Dividend yield based on FY2011/FY2012 paid out of 13 cts/11 cts, yield of about 5%. (FY2013 dividend paid out of 23 cts per share plus 1 for 6 OUE Hospitality Trust is not representative) Going forward OUE future looks promising.

OUE Limited: Significant boost from fair value gains
OUE reported 1Q14 PATMI of S$945.6m, which is up more than 100% YoY due to fair value gains from Lippo Plaza (S$114.8m) and Mandarin Orchard Singapore and Mandarin Gallery (S$986.4m), offset by an allowance for foreseeable loss of S$105.0m from Twin Peaks.

Adjusting for the impact of these one-time items, we estimate core 1Q14 PATMI at S$6.5m which is broadly within expectations. In terms of the topline, 1Q14 revenues increased 1.5% to S$106.9m; this was mainly due to new contributions of the Lippo Plaza property and the US Bank tower, offset by a S$9.1m dip in property development income.

Maintain BUY. Our fair value estimate is adjusted to S$2.87, from S$3.32 previously, after incorporating into our model the new structure of the group after its listing of OUE Commercial REIT. (Eli Lee)

OUE Asset At A Glance

1. OUE BAYFRONT & OUE LINK (Include OUE Tower 99-year lease from 12/11/07 & OUE Link 15-year lease from 26/3/10)
Value = S$1,010 million
Gross Floor Area = 503,482 sq ft (S$2006/ sq ft)

2. OUE DOWNTOWN (99-year lease from 19/7/67)
Value = S$1,361 million
Gross Floor Area = 1,244,814 sq ft (S$1093/ sq ft)

3. ONE RAFFLES PLACE (841-year, 99-year lease from 1/11/85 & 99-year lease from 26/5/83)
Value = S$1,639 million
Gross Floor Area = 1,288,717 sq ft (S$1,298/ sq ft)

4. MANDARIN ORCHARD SINGAPORE (99-year lease from 1/7/57)
Value = S$1,220 million
Gross Floor Area = 990,277 sq ft (S$1,232/ sq ft)

5. MANDARIN GALLERY (99-year lease from 1/7/57)
Value = S$536 million
Gross Floor Area = 196,336 sq ft (S$2730/ sq ft)

6. CROWNE PLAZA CHANGI AIRPORT (77-year lease from 12/12/06)
Value = S$291 million
Gross Floor Area = 336,945/ sq ft (S$864/ sq ft)

7. MARINA MANDAIN SINGAPORE (99-year lease from 9/9/80)
Value = S$552 million
Gross Floor Area = 651,531/ sq ft (S$847/ sq ft)

8. US BANK TOWER (Freehold)
Value = US$431 million
Gross Floor Area = 1,869,123/ sq ft (US$230.59/ sq ft)

9. LIPPO PLAZA (50-year lease from 2/7/94)
Value = RMB2,337 million
Gross Floor Area = 1,288,717 sq ft (RMB3,710/ sq ft)

Comparing OUE asset value on per square foot most of the properties are under value. The management are taking steps to up-grade some of these properties. Divested to OUE H-Trust and OUE Commercial REIT had been completed. Follow these the refurbishment work in the retail mall at One Raffles Place near completion, the unlocking the value of OUE Downtown and the expansion of adjacent plot of land in Crowne Plaza Changi Airport Hotel.

OUE assets enhancement & OUE consortium to develop South Korea's first Internationally Branded Integrated Entertainment Resort well positioned to benefit from further strengthening recurrent income streams & unlock value.”

1. ONE RAFFLES PLACE - RETAIL PODIUM

The five-storey retail mail at One Raffles Place which also has a basement level, under refurbishment. The mall is expected to be completed in the second quarter of 2014. With an increase in NLA from approximately 89,500 sq ft to 98,500 sq ft after refurishment. (Increased by more than 10%)

Strategically located above the Raffles Place MRT station the retail podium will be a one-stop shopping destination to meet the needs of consumers in the Central Business District. Spanning five levels and a basement, it features a wide array of shopping dining entertainment and services.

There will be a new building facade to showcase retailing activities and the interior will be refurbished to elevate the shopping ambience.

2. OUE DOWNTOWN - DOWNTOWN GALLERY

To optimise OUB Downtown's 262-metre wide street frontage and leverage the URA long-term plans are underway to develop Tanjong Pagar into an enviable work-play-live enviroment, plans are underway to transform the existing podium into a five-storey retail mall.

The new retail space, named Downtown Gallery, will comprise retail shops and F & B outlets as well as a supermarket at the basement level. The existing office lobbies on the first level serving OUE Downtown 1 and OUE Downtown 2 will be relocaated to the fourth level, clearing the first three levels for an uninterrupted mall stretching the entire length of the building. There are plans to convert the low and mid zones of OUE Downtown 1 to service apartments.

The first level and basement of the multi-storey car park, as well as part of the third level, will be converted into retail space, with a link on the third level connecting Downtown Gallery to the neighbouring residential and office.

The conversion is expected to be completed in 2016.

3. CROWNE PLAZA CHANGI AIRPORT

In line with OUE's strategy of acquiring iconic assets to boost its income stream and grow its portfolio, the Group acquired the Crowne Plaza Changi Airport and adjacent plot of land in 2011.

Crowne Plaza Changi Airport having 320 well-appointed guestrooms, including 27 spacious suites that are completed with amenities suited for business travellers. OUE recognises the potential for asset enhancement on the adjacent plot of land plans to expand the hotel by another 243 rooms as Singapore Changi Airport continues to be the region's aviation hub.

4. OUE Consortium South Korea's First Internationally Branded Intergreted Entertainment Resort

The Project will be a world-class entertainment destination consisting of hotel, retail and convention and residential properties to be developed by the Consortium, which is expected to be ready in time for the 2018 Winter Olympics in South Korea. The Project will also feature a foreigners only casino. Caesars Entertainment Corporation or one of its affiliated companies will be the investor in the project and operator of the casino. The Project is expected to involve an estimated total project cost of approximately Korean Won 855 billion (approximately SGD1 billion) with total development gross floor area of over 150,000 square metres on a 4.3 hectares site. OUE will have a significant non-controlling interest in the Project, and its participation will focus on the hotel component and convention centre of the Project.“

“OUE’s participation in this landmark project – in particular the hotel component and convention centre – reflects our ability to secure unique property development opportunities to drive OUE’s future growth and generate value for our shareholders,” said Dr Stephen Riady, Executive Chairman of OUE Limited. “OUE brings to the project its expertise in developing and operating large-scale hospitality, retail and commercial properties

OUE’s participation in the Project is subject to certain conditions, including without
limitation, further negotiation and finalisation of the definitive transaction documents relating to the Project, compliance with the pre-approval conditions, securing third party financing and finalization of the project costs. OUE will issue a further announcement as and when there is any material development in this regard. In the meantime, shareholders are advised to exercise caution when dealing in OUE shares and securities.

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OUE's recent overseas ventures in the US Bank Tower (freehold) in downtown Los Angeles for USD367.5m last year. Management believes that shareholders would be better off if OUE acquires a landmark asset (US Bank Tower) deeply below replacement value, with the potential to create value through active leasing and adding a restaurant and observation deck on top of the building.

US Bank Tower (Freehold) book value of US$431 million. Gross Floor Area = 1,869,123/ sq ft (US$230.59/ sq ft) which is very very very cheap. US Bank Tower really a big bargain and prize catch for OUE at just US$230.59/sq ft (price of HDB flat). No wonder Chinese buyers have recently offered to buy the property at several times what OUE paid for it.

OUE Management's proactive approach in identifying and creating value from assets that are neglected or underappreciated by the market could eventually pay off for shareholders in the longer term.


Daiwa Capital Markets
We reaffirm our Buy (1) rating and target price of SGD3.20, derived from our SOTP valuation of SGD3.50 after applying a 10% discount to OUE’s Singapore office property valuations.

One Raffles Place shopping mall will reopen its doors today in a soft relaunch, after completing a major refurbishment exercise that gave it a new facade.

The mall, located just above Raffles Place MRT Station and with a net lettable area of about 98,500 square feet spread over six levels, has a committed occupancy of more than 90 per cent. Its tenants will progressively open for business, with Swedish clothing retailer H&M being the first to welcome shoppers today. The mall will also be introducing other new brands, such as Uniqlo, Victoria's Secret, Melissa and Paris Baguette.

"These brands, which are making their first foray in the area, bring a dose of Orchard Road into the heart of Raffles Place," said Letty Lee, retail services director of CBRE Singapore, the project's sole marketing agency. Other tenants include brands such as The Hour Glass, Tumi, Pandora, Swatch and Owndays.

One Raffles Place, formerly known as OUB Centre, is developed and managed by OUB Centre Limited. Overseas Union Enterprise (OUE) has a 40.8 per cent stake in One Raffles Place through its 50 per cent interest in OUB Centre Limited. Besides the retail mall, One Raffles Place has two Grade-A office towers. The 62-storey Tower One, at 280 metres, is among the world's 100 tallest buildings. The humbler 38-storey Tower Two office building opened in late 2012.