Brief Consumer: OUE C-REIT – Beware of the CPPU Timebomb and more

In this briefing:

1. OUE C-REIT – Beware of the CPPU Timebomb
2. BGF Holdco/Sub Trade: Sub Overbuying Wouldn’t Last Another Day
3. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

1. OUE C-REIT – Beware of the CPPU Timebomb

Whilst OUE C-REIT’s DPU yield and Price-to-NAV appears to be attractive vis-à-vis its peers, investors should take note of the implications of the S$375 mil Convertible Perpetual Preferred Units (“CPPU”) and its impact on OUE C-REIT’s DPU going forward.

Assuming that all S$375 mil CPPUs are converted, a total of 524.2 mil new OUE C-REIT will be issued to OUE Ltd, and the total unit base of OUE C-REIT will expand by 18% to 3,385.8 mil units.

For minority investors of OUE C-REIT, they face the risk of having their DPU yield diluted from a projected 7.1% (before conversion) to 6.2% after conversion.

 A Rights Issue to fund CPPU Redemption will be more dilutive than the conversion scenario. Assuming a Rights Issue at 20% discount, DPU yield of OUE C-REIT will drop from a projected 7.1% (before conversion) to 5.8% after Rights Issue.

Minority investors are likely to be at the losing end of this CPPU issue and suffer from yield dilution. Investors should avoid OUE C-REIT for now as the uncertainty over the CPPU conversion remains.

For investors who are still keen to take a position in OUE C-REIT, a fair post-conversion diluted DPU yield would be 6.6%, translating to a recommended entry price of S$0.465 per unit.

2. BGF Holdco/Sub Trade: Sub Overbuying Wouldn’t Last Another Day

• BGF Sub had a 5.39% gain on better-than-expected 4Q18 results. Holdco stayed flat. As a result, we had a 2+σ jump from 95% of σ to -133% of σ. This is the widest jump in 120D. Holdco discount is currently at 47% to NAV.
• On a 120D horizon, price ratio is still well below 120D mean. Despite recent gains, Holdco price relative to Sub is nearly 20+%p down since 120D ago. 4Q results seem to be encouraging. But local sentiments are still heavily divided on Sub’s fundamentals. 4Q results aren’t strong enough to turn the tide drastically.
• Sub has been one of the most heavily shorted stocks in Korea lately. Yesterday’s huge gain might have been a short covering. This shouldn’t be a structural price pushing up for Sub. Sub staying below -1σ wouldn’t last another day. I expect a quick mean reversion at this point.

3. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

Parco (8251 JP) is enjoying a new lease of life under J Front Retailing (3086 JP) ownership, investing assiduously in updating existing buildings and showing a decisiveness to rebuild entirely where location merits it and even closing down stores that don’t work.

It will celebrate its 50th anniversary this year by opening four new buildings, including the flagship Parco Shibuya and is forecasting a 28% rise in revenue for 2016-2021.