SINGAPORE (Mar 6): Year-to-date, property developer Hongkong Land has seen its share price fall some 12% amid growing global economic uncertainty led by the coronavirus outbreak.
However, as stocks around the world brace themselves for a battering in terms of earnings and share price figures, DBS Group Research remains optimistic about Hongkong Land and chooses to believe that a large majority of negatives have already been priced in for the stock, which will in turn cushion further downside risk against its share price.
For FY2019 ended December, Hongkong Land reported earnings of US$198.0 million ($274 million), down from earnings of US$2.48 billion a year ago. This was due to the group booking losses of some US$878.4 million from lower valuations of the group’s investment properties, compared to net gains from revaluations amounting to US$1.42 billion in FY2018.
Excluding this, underlying profit came in at US$1.08 billion, up 4% y-o-y. This came on the back of mainly led by increased development profit from China due to higher sales completions despite lower residential contribution from Singapore.
See: Hongkong Land's FY19 earnings plunges to $274 mil on fair value losses
Despite the decline across several top-line financial metrics, DBS analyst Jeff Yau notes that gross rental receipts climbed 2% due to improved office contributions from the group’s Central portfolio.
“Office rental reversion remained positive,” says Yau in a Friday report. “This led to average
office rents increasing 4% y-o-y to HK$118psf.”
Yau adds that due to a combination of subdued leasing demand, prolonged protests and US-China trade tensions, vacancy rose to 2.9% from 1.4% last year.
“Office vacancy of its Singapore portfolio stood at 5% in December 2019. However, on a committed basis, vacancy was low at 0.7%. Favourable rental growth was recorded upon lease
renewals. This resulted in average office rents rising to $9.70 psf in 2019 from $9.20 psf in 2018,” adds Yau.
For the China market, Hongkong Land’s attributable contracted sales in China surged 18% to US$1.87 billion in 2019, due to a change in sale location mix.
“In Feb 2020, Hongkong Land acquired a mixed-use site in West Bund of Shanghai via government auction for US$4.4 billion. This marked the largest land acquisition the company has ever made in China,” says Yau.
Yau shares that some 22% of the site’s gross floor area (GFA) included office and residential spaces which will be earmarked for sale, while the land premium is slated to be paid by installments in FY2020.
“This sizeable project will be constructed in multiple phases with targeted completion in 2023-2027. When completed, this mixed-use development is set to boost the company’s recurring income,” says Yau.
Although the payment will see Hongkong Land’s net gearing increase to 20% from the current 9%, Yau stresses that the group’s financial risk should remain manageable.
However, in tandem with the ongoing Covid-19, the brokerage is expecting the group to be impacted by project delays and lower sales completions.
“The coronavirus outbreak has led to temporary halt in development activities. The resulting delays in sales completions are likely to lower the contributions from residential sales in China,” says Yau.
“Retail properties in Hong Kong and Beijing are also impacted by the virus outbreak,” he adds.
As Hongkong Land’s share price is believed to have already priced in most of the downsides, DBS is reiterating its “buy” call on the stock with a lower target price of US$5.81, representing a 15% upside.
As at 4.23pm, shares in Hongkong Land are trading 12 US cents lower, or down 2.4%, at US$4.93. This translates to a price-to-earnings ratio of 11.7 times and a dividend yield of 4.3% for FY2020F according to DBS valuations.
