SINGAPORE (Nov 10): DBS says Hongkong Land, trading at 38% discount to its assessed current NAV, is inexpensive from a historical perspective.
In addition, tight vacancy and solid demand continues to support office rents which, coupled with yield compression, have boosted office prices further.
“These factors should warrant a higher stock valuation for Hongkong Land,” says analyst Jeff Yau, who is calling a “buy” with US$8.93 ($12.15), based on 30% discount to DBS’ June 2018 NAV estimates.
To be sure, vacancy for Hongkong Land’s Central office portfolio did inch up slightly to 2.4% in Sept from 1.5% in June, but should improve before year-end when new tenants take possession of their units.
Given tight market supply, rental reversion remains positive, driving income growth. Hongkong Land’s retail portfolio also remains effectively fully leased with flat base rental reversion.
Meanwhile, its Singapore office portfolio is showing signs of improvement. Reversionary growth has started to turn positive but Yau says it is premature to conclude that the trend is sustainable. Vacancy stayed low at less than 1%.
Elsewhere in Beijing, WF Central, a retail-led mixed use development, is scheduled to open in late Nov. This should widen and diversify the company’s rental earnings base.
In 3Q17, contracted sales in China fell 12% to US$195 million. This brought total contracted sales for 9M17 to US$896 million, representing 37% growth.
In Singapore, pre-sales at Sol Acres and Lake Grande are ongoing. These projects have been substantially pre-sold with corresponding completions scheduled in 2018 and 2019.
As of Sept, net debt was marginally higher compared to June’s US$1.88 billion. This is set to rise further by year-end due to land premium payments for new projects.
“Financial risk should remain well managed with gearing estimated to be <15%,” adds the analyst.
Shares in Hongkong Land are trading 4 cents higher at US$7.36 or 18 times FY18 earnings.