Hongkong Land trades perennially at a discount to its net asset value (NAV). After a temporary rebound where its price to net asset value ratio (P/NAV) reverted to its mean (see chart) of 0.33 times, the stock retreated and P/NAV may continue to ease towards the –1 SD (standard deviation), which is 0.26 times.
Based on a NAV of US$14.75, a P/NAV of 0.26 translates to a price of US$3.83. Notably, Hongkong Land made a high of US$4.85 on Sept 9. At this price, the P/NAV was 0.33.
Neither price nor NAV are static. NAV changes every six months depending on the company’s earnings and more importantly its retained earnings. In addition, some of its retained earnings are likely to be used for the share buyback.
On Sept 6, Hongkong Land announced a planned US$500 million share buyback programme from now till December 2022. Since the announcement, Hongkong Land has bought back some 2.25 million shares for less than US$11 million.
The company had said that the purpose of the share buyback is to reduce the capital of the company. Still, the US$500 million is unlikely to make much of a dent in Hongkong Land’s US$34.4 billion of shareholders’ funds.
In 1HFY2021 ended June, Hongkong Land reported a net loss of US$865 million compared to a net loss of US$1.83 billion in FY2020. However, underlying profit to shareholders rose 12% to US$394 million. Annualised, this translates into an ROE of just 2.3%.
If the purpose of the share buyback is to raise ROE, the company could have been better served by securitising its vast commercial portfolio. As at Dec 31, 2020, the Central portfolio (in Hong Kong), which includes retail and a hotel, was valued at US$28.01 billion.
As it stands, Hongkong Land’s P/ NAV is likely to fluctuate between a large discount to NAV and a larger discount to NAV. Based on the pattern of the share buyback so far, the price range is from $4.31 to $4.67, with much of the buying in the $4.40 to $4.50 range. Hence, this level could provide a technical support and a P/ NAV support that translates into a P/NAV of 0.30. To be able to break out of its mean, Hongkong Land would need some form of transformation which it may not be willing to undertake in the short term.
As the impact of Covid recedes, Hongkong Land’s earnings are likely to recover. This would translate into higher shareholders funds and a higher NAV. In order to maintain the P/NAV at 0.33, prices would rise. For instance, if NAV rises above US$15, the stock price could recover to US$5. Interestingly, some analysts expect the share buyback to raise NAV to US$15.31. Hongkong Land is trading at around US$4.61.
Elsewhere, DBS Group Holdings has been somewhat volatile in the past week or two amid concerns that it could be impacted from the fallout from China Evergrande Group’s debt crisis. DBS and the other two local banks have no exposure to Evergrande.
Against this background, the banks should rebound. Technically, DBS fell below both its 50-day moving average (currently at $30.24) and its 100-day moving average, now at $30.01. This suggests that the rebound is likely to meet with resistance at these two levels.
Despite the rebound, the chart pattern does not indicate strength, and points to prices moving towards $28, to build a base before the stock is able to recover.
