OUE revamp turns 6 Shenton Way into "crown jewel"

"Will yield rich organic-returns," says Maybank.

Maybank Kim Eng expressed optimism that the authorities' recent in-principle approval of the revamp of 6 Shenton Way will deliver gains to OUE because of the limited retail space currently available in the Central Business District.

OUE plans to convert two-thirds of a tower at the location into serviced apartments, while the one-third will be leased to office tenants, with the retail podium comprising a sprawling four-storeys with net leasable area of approximately 155k sqft.

Here's more from Maybank Kim Eng:

Investment thesis intact. Our asset-play thesis remains on-track and we believe OUE’s plans to revamp the retail podiums at ORP and 6 Shenton Way will yield rich organic-returns, given the limited amount of quality retail space in the CBD area. The stock is one of the most inexpensive developers in our coverage universe (adjusted P/BV of 0.7x vs sector average of 1.1x), offering 22% EPS CAGR over FY12-15F. Reiterate BUY with unchanged TP of SGD3.57.

1Q13 PATMI dragged down by one-off F&N-related expenses. 1Q13 revenue at SGD105.4m (-14% QoQ; +8% YoY) was 24% of ours and consensus estimate. The YoY increase in total revenue was mainly due to higher revenue recognised by Twin Peaks, offset partially by lower contributions from the hospitality and commercial rentals segments. The relocation of DBS out of 6 Shenton Way Twr 1 to MBFC Twr 3, resulted in a S$3.5m YoY dip in gross revenue. 1Q13 core PATMI at SGD7.8m (+126% QoQ; -71% YoY) was 5% of ours and 7% of consensus estimate. Finance expenses jacked up 9% QoQ and 82% YoY on the back of the F&N acquisition transaction, which lapsed in Jan 2013. It resulted in higher interest cost from more borrowings and exchange loss arising from translation of a USD loan and the mark-to-market fair value loss on the USD/SGD currency swap. Arising from the hedge, the exchange losses (total ~SGD13m) for this quarter would be a one-off expense.

6 Shenton Way given the green light. OUE has gotten the in-principle approval from authorities to convert two-thirds of a tower of 6 Shenton Way (~163k sqft) to service apartments. The remaining one-third on the top floor will continue to be leased out to office tenants. Preliminary capex estimate stands at SGD50-60m. This property will serve as the pipeline asset for the upcoming hospitality REIT when completed in two years. OUE also revealed that the retail podium will comprise four-storeys with NLA of 155k sqft. A redevelopment tender has been called for ~SGD150m and construction will commence in three-months time. Once completed, 6 Shenton Way represents the single most important asset in OUE’s portfolio, contributing SGD1.56/shr (30%) to RNAV.

Hospitality REIT coming to fruition. Management revealed that it is running full-steam on the hospitality REIT which will be announced very soon. Preliminary injected assets will include Mandarin Orchard Singapore (MOS) and Mandarin Gallery, with OUE likely taking up 20-30% stake in sponsor units. OUE also informed that MOS has a cap rate of ~7% (above our initial estimates of 5.7%) and there is a SGD750m loan (maturing in 1-2 years) secured against MOS/Mandarin gallery. We adjusted our REIT assumptions, with total equity size of ~SSGD1bn and the spin-off possibly raising ~SGD800 (SGD0.90/shr) in cash for OUE. OUE also mentioned that it is considering paying a special dividend to unitholders, which we estimate at SGD5-14 cents in FY13 (5-15% payout from proceeds).