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Broker's take: OCBC upgrades OUE H-Trust to 'buy'

CITING that OUE Hospitality Trust's (H-Trust) is "too cheap to ignore", OCBC Investment Research has upgraded its rating on the counter from "hold" to "buy", while maintaining its fair value estimate of S$0.79. 

The brokerage noted that OUE H-Trust's unit price has declined 7.3 per cent since its Sept 10 close, following the announcement of a related party's acquisition of OUE Downtown office components, via a dilutive rights issue.

"We believe OUE H-Trust's sharp unit price decline was prompted by concerns of an equity fundraising in the near term to fund the acquisition of one of its ROFR (right of first refusal) assets, Oakwood Premier, the serviced residence component of OUE Downtown.

"Note that OUE H-Trust's gearing stands at 38.7 per cent as at June 30, implying a debt headroom of S$250 million up to the regulatory limit of 45 per cent."

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OCBC added that Oakwood Premier which began operations in June last year, has yet to reach optimal occupancy levels and requires more time to stabilise before it is being offered for sale.

"Even if OUE H-Trust does acquire Oakwood Premier, we believe it is more likely to conduct a placement as opposed to a rights issue given the size of the potential acquisition. We roughly estimate the valuation of Oakwood Premier to be in the range of about S$1 million to S$1.2 million on average per key (S$268 million to S$322 million in aggregate).

"In any case, current conditions do not seem particularly ripe for equity financing after the recent rout... our base case is that OUE H-Trust will not pursue an acquisition of Oakwood Premier in the near-term," OCBC said. 

The brokerage also noted that OUE H-Trust's Mandarin Orchard Singapore (MOS) has a high RevPAR (revenue per available room) base to cross in Q3 2018, and that the quarter will be compared to Q3 2017 results which included CPCA (Crowne Plaza Changi Airport) income support.

Nonetheless, it is of the view that prospects for the trust in 2019 appears bright, with the Crowne Plaza Changi Airport at the cusp of surpassing its minimum rent, and with the opening of the nearby Jewel Changi Airport expected in end March next year. 

"As of Sept 19’s close, OUE H-Trust is trading at 7.3 per cent fiscal 2018 yield and 7.5 per cent fiscal 2019 yield, and we find the Reit (real estate investment trust) to be very attractively valued," OCBC said. 

As at 2.57pm on Thursday, the counter was trading at S$0.70 per unit, up 1.4 per cent, or one Singapore cent. 

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