OUE offers deep value despite earnings uncertainty: Daiwa

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Daiwa is sticking with a Buy call on OUE, saying it saw “deep value” which would emerge “at some stage,” despite “near-term operational issues.”

Those issues were substantial: While it said it expected the biggest earnings-growth driver to come from higher rental income at Downtown Gallery, it added “other potential earnings drivers remain unclear.”

“OUE was unable to acquire any Singapore residential or commercial land bank in 2017, and we believe the possible acquisition of any site in 2018-19 would come with a considerably higher development risk, particularly for residential,” Daiwa said in the note on Monday.

Daiwa also pointed to the foray into healthcare real estate by acquiring OUE Lippo Healthcare in March of 2017, which posted losses in 2017. The bank said it expected the unit to post operating losses through 2018-2020.

No visibility on OUE Lippo Healthcare

”Management appears excited by the growth potential of this platform, but we see no visibility,” Daiwa said.

The bank cut its core earnings per share (EPS) forecast by 11-13 percent for 2018-19, after it lowered its operating forecasts for OUE Downtown and Downtown Gallery.

Daiwa lowered its target price to S$2.59 from S$2.86, noting that it assumed zero value for OUE Lippo Heathcare.

It noted that fourth-quarter net profit of S$65.7 million beat its forecast of S$21.3 million, largely on a S$108 million fair-value gain on investment properties, which was mostly from subsidiary OUE Commercial REIT.

Operating profit for the quarter, excluding revaluation gains, was below Daiwa’s forecast, the report said, with a S$46 million provision for legal and related expenses by OUE Lippo Healthcare the main drag.

Shares of OUE ended down 0.52 percent at S$1.93 on Tuesday.

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