Hongkong Land / HKL (US$4.20, down 2 cents), which has been persistently trading at less than a third of its NAV, plans to spend up to US$500 million to buy back shares from the market between now and Dec 31 2022. The purpose of the buy backs is to reduce the capital of the company, which owns large tracts of prime proper es in both Hong Kong, Singapore, and across the region. As the holding of treasury shares is not provided for in the company’s constitution, any shares which are repurchased by the company will be cancelled. According to Hongkong Land in its Sept 6 announcement, the buyback is in line with its long-standing capital allocation practice.
Its priorities are, first, investment in new assets to drive long-term growth and shareholder value; next, continued payment of steady and, over time, increasing dividends and last but not least, investment in existing assets on an opportunistic basis, including through share buybacks. “The group has and remains committed to retaining a strong balance sheet which provides financial resilience through the cycle,” the company adds. For 1HFY2021 ended June 30, the company, having taken a write down in the fair value of its proper es, reported a loss of US$865 million, an improvement from US$1.8 billion in the red from the year earlier period. Without the write-down, the company’s underlying earnings for the same period would be US$394 million, up 12% y-o-y from US$353 million.
Despite the losses, HKL is paying an interim dividend of 6 US cents per share – the same amount paid this me last year. As at June 30, the company’s net asset value was US$14.75, down slightly from US$15.30 as at June 30 2020. Separately, Bloomberg reported that the biggest landlord in Hong Kong’s most expensive office market (HKL) expects demand to withstand concerns about political clampdowns and pandemic setbacks. HKL said leasing demand is robust for its dozen interconnected office blocks in the heart of the city’s financial district known as Central.
Business has not been affected by the introduction of the national security law or tightened quarantine rules. “In reality we don’t see the leasing demand subsiding at all,” Chow said. “What we see is a lot of corporates now are elevating and going back to quality.” HKL’s optimism stands in contrast to the overall performance of the rental industry in Central. The vacancy rate in the upscale district rose to 9.6% at the end of July from 5.7% a year ago, according to data from JLL. Office rent prices in the area fell 3.3% in the first seven months of the year, JLL said.
Hong Kong’s office sector will remain a “tenant’s market” in the next 12 months, Rosanna Tang, head of research in Hong Kong for Colliers International, said on Bloomberg Television on Monday. The fi rm forecasts a correct on in office rents in 2021 before recovering from 2022 onward. HL’s office properties are among the most prestigious in the city with tenants including JPMorgan Chase & Co., KPMG and Hong Kong Exchanges & Clearing Ltd.
To maintain its competitiveness in a slow market, the century-old company has been creating new services. In an uncommon move, HKL recently opened a flexible working space to capture the demand for agile workplace leasing. Going forward, it aims to off er health and wellness amenities to its tenants to match their changing lifestyle. “In the office space now, there is a convergence of how people want to live and how people want to work,” said Chow. “It’s almost a situation where you need to have these facilities in the ecosystem.”
With these positive news flow, we continue to reiterate an “Accumulate” rating on HKL as it embarks on its corporate actions to support its share price. Valuations are also extremely undemanding and currently trades at at 10x Forward PE and 0.3x PB with an attractive 5.25% div yield. Consensus target price stands at US$5.81, representing 38.3% upside from current share price.