Hongkong Land, perenially trading at a discount to its net asset value, announced on Sept 6 that it plans to invest up to US$500 million in a share buyback programme extending until December 31, 2022. Hongkong Land’s share price reacted positively, and has drawn attention to its still large discount to NAV. This alone could attract investors.
In addition, Hongkong Land reported a net loss of US$865 million in 1HFY2021, 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%.
“The purpose of the share buyback is to reduce the capital of the Company. 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,” Hongkong Land said in a statement.
Even with the reduction, the US$500 million is unlikely to make much of a dent in Hongkong Land’s US$34.4 billion of shareholders’ funds.
In an announcement, the company said the buyback is in line with Hongkong Land’s long-standing capital allocation practice which is to prioritise: investment in new assets to drive long-term growth and shareholder value; continued payment of steady and, over time, increasing dividends; and investment in existing assets on an opportunistic basis, including through share buyback.
Largest share buyback
DBS Group Research has calculated that the amount allocated for the share buyback represents 5.1% of Hongkong Land’s outstanding number of shares based on US$4.20, the closing price onf Sept 6. At its current price of US$4.74, HongKong Land would be able to buy back 105 million shares, or 4.5% of shares outstanding based on its shares outstanding of 2,333.9 million.
According to DBS Group Research, the buyback would raise the net asset value to US$15.31 per share. As at June 30, the company’s NAV was US$14.75.
Read my research on Hongkong Land here.
“This marked the company’s largest share buyback program in more than two decades. Back in 2000, Hongkong Land announced to repurchase a maximum 260 million shares or 10% of its outstanding shares with maximum offer price of US$2.2 per share. The company finally managed to buy back 131.5 million shares via this tender offer. In 2018, Hongkong Land also repurchased 18.88 million shares for US$131 million,” DBS analyst Jeff Yau recalls.
“In our opinion, this large-scale share repurchase program signals the stock’s strong embedded value and should lend support to its share price which was under pressure of late,” Yau reckons.
At the last done price on Sept 7, after the share buyback announcement, Hongkong Land continues to trade at 0.32 times its latest NAV.
Gearing is estimated to rise by 1.6ppts to 14% from June 30, 2021’s 12.4%. Despite slightly higher gearing, the company’s financial strength should remain healthy to pursue for acquisitions when opportunities knock, DBS calculates.
Other ways to narrow discount
The share buyback programme is a trifle short of the US$513 million in dividend payouts that company has had in FY2020 and FY2019. Could Hongkong Land have doubled its dividends instead? Some investors obviously think so.
Are there other ways to narrow the discount between share price and NAV? Probably.
In Hong Kong, the Group’s Central Portfolio consists of 12 interconnected commercial buildings forming the heart of the financial district in Central, providing over 450,000 sq. m. of Grade A office and luxury retail space. As at Dec 31, 2020, the Central portfolio, which includes retail and a hotel, was valued at US$28.01 billion.
In Singapore, Hongkong Land owns a one-third stake in Marina Bay Financial Centre and One Raffles Quay. Based on Keppel REIT’s valuation of its 33.3% share, the Singapore portfolio is valued at $4.17 billion.
Could Hongkong Land have securitised these choice assets in a REIT and paid a special dividend to its shareholders? Investors certainly think so.
Robert Wong, chief executive of Hongkong Land still makes a case for being embedded in Central (in Hong Kong). “In Central, the bulk of our tenant base is financial, legal and accounting firms and these comprise 80% of our portfolio. Our business depends on whether Hong Kong continues to grow or maintain its status as key financial market in the region. Our capital market is very active, IPOs keep coming through, and legal is doing well because legal is a key part of capital markets. If the financial market continues to perform healthily then the demand equation should be positive,” he says,during the company’s 1HFY2021 results briefing, adding of course that the main uncertainty is the pandemic.
Read my research on Hongkong Land here.
A big driver of luxury spending in Central is from Chinese tourists, and the border is closed.Wong is expecting rental reversions of Central’s office and retail space to be negative. However, he is confident Hongkong Land’s active leasing management is likely to keep occupancy above average in Central.
Of course some market watchers see the share buyback programme as Hongkong Land’s somewhat traditional management making an effort to reduce the discount between price and NAV.
CGS-CIMB says, “We think the [buyback] programme reflects management’s positive response to investors’ concerns on HKL’s persistently deep discount to book value and NAV. It trades at a 59% discount to [our] end-FY2021 forecase NAV, with a 5.2% dividend yield, and is one of the cheapest Hong Kong landlords.” CGS-CIMB has an Add recommendation and a target of US$5.70 for the stock.
Photo credit: MBFC by Albert Chua