Trough valuation in sight
Investment Thesis
Deep embedded value. A-Living is now trading at a level that is attractive even on the perspective of a dividend play. In the theoretical scenario of 1) the company opts to lift its dividend payout to 90% like the rest of HK-listed REITs; and 2) include only the recurring portion of its earnings (i.e. strip out all property
agency, non-property owner VAS contributions), A-Living can potentially offer an unlevered 10% FY22F dividend yield. This can places A-Living meaningfully above that of HK-listed REITs’ current levered distribution yield of 6.3%, implying deep embedded value for investors.
Concerns over Agile’s liquidity struggle and potential physical market slowdown reflected in the price. We believe earnings downside from Agile and physical market slowdown have been taken into account in our latest FY21-23F earnings estimates that are 10-26% below current market estimates. On the other hand, while there is a possibility that Agile may opt to dispose more stakes in the future for liquidity, A-Living is already trading at an attractive valuation even as a M&A target (at c.11.5x FY21F PE – having stripped out all contributions from property agency and other non-property owner VAS). We believe the company will soon reach its trough valuation.
Valuation:
Our new TP is based on 12.2x FY22F EPS, which is on par to the company’s average 1-year forward PE in 2H21.
Where we differ:
Deep embedded value. A-Living is capable of offering a more attractive recurring dividend yield than a typical HK REITs even if 1) we exclude all non-recurring income – i.e. property agency and non-property owner VAS; and 2) assume zero growth for its recurring business segments.
Key Risks to Our View:
Stake disposal from major shareholder a share price overhang. With dust yet to settle in the property sector, Agile may opt to further dispose of its stake in the company or to utilize the stake as an underlying asset to facilitate further bond issuances (e.g. in form of another exchangeable bond).