UOB KayHian initiates Overseas Union Enterprise (LJ3.SG) at Buy with a $4.25 target price, pegged at parity to FY11F RNAV, offering about 25% upside from current levels.

The house forecasts minimum FY11-12 yield of 2.6% and 3.3% based on a 50% dividend payout, adding the stock is an “attractive developer play on office upcycle.”

UOB-KH notes OUE is the sixth-largest listed property developer in Singapore, deriving nearly 60% of its value from the office segment; the company is in advanced negotiations to secure another mega-deal similar to its recent acquisition of DBS Towers, which could act as a further rerating catalyst.

The house expects office rentals and capital values to rise 9%-10% in 2011 and 17%-20% in 2012, adding the company is gaining market acceptance on investor-friendly initiatives and asset enhancement initiatives will offer an advantage due to the scarcity of retail malls in the CBD, while it is also a beneficiary of favorable hotel outlook. Shares are +1.8% at $3.46.