Over the last few weeks, I have been mulling over OUE Ltd. The company certainly does seem attractive, but it does have its drawbacks as well. Nevertheless, sensing that it was grossly undervalued, I made a purchase at $2.83. The share price eventually went lower to $2.68 a few days later, but has now recovered back to my entry price.
The reasons why I purchased this company were:
1) Having the confidence that the (a) proposed disposal of Mandarin Gallery & Mandarin Orchard into OUE H Trust & (b) proposed special dividend of up to 50% of remainder fees after allowing for debt repayment of $750 million would go through since majority of the shares were owned by or connected to the Lippo Group
2) Tax savings- By grouping its mainstay properties (Mandarin Gallery & Mandarin Orchard) under a Real Estate Investment Trust, the Group stands to reap tax savings, if it distributes 90% of its income every year
3) Recurring income in the form of the 1) manager’s management fee, 2) trustee’s fee, & the 3) property management fee would provide a steady stream of cash to the Group
4) Reduction of debt- By using the sales proceeds from the two buildings to reduce debt of $750 million, the Group effectively lowers its finance expenses in light of potential rising interest rates. This helps to strengthen the Group’s balance sheet, reducing the net debt to equity ratio from 62.1% to 14.8%
5) Special Dividend after sales of properties- OUE Ltd has announced that it would issue a special dividend up to 50% of remainder fees after allowing for the debt repayment. On a share price of $3, this might work up to a yield of 11%
6) Grossly undervalued business- NTA of OUE Ltd would rise to $4.59/share from $3.44 after the proposed sale. This makes my entry price of $2.83 at a 38% discount to its NTA.
Some of the negative issues were:
1) Reduction of income as OUE Ltd would own only 30% of the proposed trust
2) Earnings from the two properties are less than what the Group is renting the properties for under the new trust
However, after making some calculations, I arrived at a conclusion: OUE Ltd’s earnings will improve after the proposed listing of its properties under a REIT. The sum of its tax savings, interest payment savings, management fees, and earnings from the two properties would outweigh the rental expenses that it would pay to the REIT. As such, foreseeing a better future for OUE Ltd, plus the unlocking of value of its properties, OUE is a buy for me. However, my investment in OUE is more short-term oriented, as I do not think that it is a business with a strong economic moat or strong growth prospects. I believe that the share price would reflect its true value in the coming months due to the issuance of its special dividend, and that might just be the time to sell.