Result Analysis: Higher recurrent earnings from hotels, car parks and gaming operations
Far East Consortium’s FY22 net profit came in at HK$1.3bn, up 139%, aided by substantial disposal gains from divestment of Dorsett City London and revaluation gains from office portion of Kai Tak development The results were ahead our forecast due to stronger-than-expected development earnings.
Final DPS rose 7% to HK$0.16, which was a positive surprise. This brought the full year DPS to HK$0.20. (FY21: HK$0.19). To celebrate its 50th anniversary since its listing on the Hong Kong Stock Exchange, the company has proposed a 1-for-10 bonus issue.
Gross profit increased 8% to HK$1.98bn due to sharp earnings rebound for hotel and gaming operations and as car park operations returned to profitability. The growth, however, was partially offset by lower development earnings.
Hotel operations staged a strong rebound, as gross profit more than quadrupled to HK$500m. This was supported by robust recovery amongst Hong Kong hotels which had adjusted their business model to cater to quarantine guests. Backed by significantly higher room rates, the Hong Kong hotel RevPAR jumped 71% to HK$687. Overall, RevPAR of Dorsett Group Hotels jumped 68.2% in FY22 , while RevPAR for TWC Hotels also rebounded 70.8% on a low base.
Gross profit from gaming business surged to HK$114m from FY21’s HK$10m thanks to re-opening of TWC’s casinos and better cost control. On the other hand, no dividend income was received from Australia-listed Star Entertainment. Carpark operations swung to black with gross profit of HK$82m (FY21: loss of HK$4m) due to loosened restrictions in the company’s major operating areas, in particular in Victoria, Australia and strong recovery from Manchester, UK.
On the other hand, property development delivered gross profits of HK$1.1bn, down 28% y-o-y. This came from selling West Side Place (Towers 1 & 2) in Melbourne, MeadowSide Plots 2, 3 & 5 in Manchester with the balance from inventory sales in Shanghai/Guangzhou, and progressive booking of Hyll on Holland in Singapore.
Dorsett Gold Coast opened for business in Dec-21. This was followed by the opening of Dao by Dorsett West London (the extension of Dorsett Shepherds Bush) in Jun-22. This newly built hotel together with soon-to-be-rebranded Dao Dorsett ATMD Singapore, will target the long-stay market.
As of Mar-22, Far East Consortium had attributable contracted pre-sales of HK$16.7bn which will be recognized in FY23-25. This points to good visibility of development profits in the years ahead.
Far East Consortium offered to sell the newly completed Mount Arcadia in Shatin through tender in early April after the pandemic situation showed signs of stabilization. Initial market response has been enthusiastic with 33 units sold for HK$668m. ASP exceeded HK$17,300psf. Mount Arcadia contains 62 apartments and 4 houses with total saleable area of 84,000sf. Located on Tai Po Road, the project is just a 5-minute and 8-minute drive from Tai Wai and Kowloon Tong respectively. The company acquired the site for HK$245m in Mar-16. A complete sale of Mount Arcadia should yield pre-tax earnings of c.HK$700m. The recent sale of Tower 5 of Queen’s Wharf Residences in Brisbane also attracted strong interest.
Net debt rose to HK$21.3bn in Mar-22 from Sep-21’s HK$19.3bn reflecting land banking activities and construction expenses incurred. This put its gearing at 58%.
The stock is trading at 80% discount to our assessed current NAV and offers dividend yield of 8.5%. The valuation is unjustifiably low in view of improving recurring earnings from its hotel, car park and gaming business. Far East Consortium is also unlocking its hidden value through disposals. The sale of office tower in Kai Tak to CLP Holdings and disposal of car park and retail units in Australia/New Zealand are cases in point. This not only helps to improve its financial strength but also boosts its bottom-line earnings. We maintain our BUY call with HK$3.86 TP. This is based on target discount of 70% to our Jun-2023 NAV estimate.