Maybank upgrades OUE Reit to ‘buy’ amid lower cost of debt in Q3
Target price is raised to S$0.38 from S$0.30 previously
[SINGAPORE] Analysts are positive on OUE Real Estate Investment Trust (Reit) on the back of its declining cost of debt in Q3 – with Maybank Securities equity analyst Krishna Guha on Tuesday (Oct 28) upgrading his call on the counter to “buy” from “hold”.
In Guha’s report, he noted that this rating comes amid “lower finance costs” by the Reit and a relatively unchanged operating trend “with stable occupancy for Singapore commercial assets continued”.
The analyst raised his target price on the counter to S$0.38 from S$0.30 previously.
This comes after the manager of the Reit reported its earnings for the third quarter ended Sep 30 – a 5.6 per cent fall in net property income (NPI) to S$57 million for the period, from S$60.3 million the year before. Revenue declined 5.8 per cent to S$70.5 million, from S$74.8 million previously.
But analysts from OCBC and Maybank Securities argued that the decline was mainly due to the divestment of Lippo Plaza in Shanghai in December 2024. Revenue and NPI, on a same-store basis, in fact grew 1.2 per cent and 2 per cent on the year respectively, led by performance of its Singapore-centric portfolio.
“As interest rates decline, and with dry powder from the divestment of Lippo Plaza Shanghai still sitting on the Reit’s balance sheet pending deployment, we think the possibility of inorganic growth has increased for the Reit,” said OCBC equity research analyst Ada Lim in her Oct 24 note.
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Finance expenses of the Reit fell 19.7 per cent during the period, due to 70 basis points (bps) decline in cost of debt, the analysts noted.
“This therefore nudges our terminal growth rate assumption up by 25 bps to 1.25 per cent,” she added. Lim raised her target price on the Reit to S$0.36 from S$0.335 previously, while reiterating a “buy” rating.
The analysts observed that OUE Reit’s aggregate leverage stood at 40.9 per cent as at Sep 30, up from 40.3 per cent as at Jun 30. Assuming the net proceeds from the sale of Lippo Plaza are fully utilised to repay loans however, this figure is expected to fall to 37.7 per cent.
Weighted average cost of debt improved 10 bps to 4.1 per cent over the quarter, and management expects distribution per unit (DPU) to increase by S$0.0004 for every 25 bps decline in interest rates.
“With Singapore dollar rates trending lower and the bulk of interest rate swaps coming off in the next two years, management sounded optimistic of capturing greater finance cost savings going forward as loans are progressively refinanced, in our view,” Lim said.
Hotels under OUE Reit had continued revenue per average room decline of 5.7 per cent year on year spread across both Hilton Singapore Orchard (HSO) and Crowne Plaza, Changi Airport.
Still, Maybank’s Guha believes that the new management for HSO is likely to result in stable performance and 2 to 5 per cent revenue per average room growth for FY2026.
“We raise FY2025/FY2026 DPU by 2 per cent and 0.5 per cent, factoring in higher margins for hotels and lower borrowing costs,” he said.
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