Result Analysis: Aided by property disposal gains
Stripping out the revaluation gains on investment properties, HKR International’s FY22 net earnings came in at HK$960m, up 11%, aided by gains on disposal of its properties in Tokyo. This was despite lower development profit. Final DPS stayed unchanged at HK$0.05, taking the full-year DPS to HK$0.08. (FY21:HK$0.09)
Including associates and joint ventures, after-tax profit from property development fell 39% to HK$450m. Poggibonsi in Discovery Bay remained the key contributor with profit from 58 units sold. Since its initial launch in Mar-19, the company has sold 188 units for c.HK$2.5bn or c.HK$16,500psf. This represented 96% of the total. Elsewhere, HKR also booked profits from selling five houses at IL PICCO in Discovery Bay. Other projects booked included the Creekside One and Mansion One, both in Jiaxing, and Elite House in Shanghai.
Rental income remained largely stable at HK$500m. The revenue shortfall from the disposal of properties in Tokyo was offset by contributions from newly acquired office floors and carparks at Jinsha City in Hangzhou and rising contributions from revitalized West Gate Tower in Cheung Sha Wan and newly opened DB Plaza in Discovery Bay. Committed occupancy at West Gate Tower reached 57% in Mar-22.
Profit contributions from HKRI Taikoo Hui grew 21% to HK$275m. HKRI Centres 1 & 2 in Shanghai remained fully let in Mar-22, with spot rates of Rmb350psm-Rmb450psm. However, due to the volatile pandemic situation, tenants’ sales of 94%-let HKRI Taikoo Hui were 27% y-o-y lower in 1Q22, after jumping 29% in 2021.
As of Mar-22, net debt stood at HK$7.94bn, down 5% from Sep-21’s HK$8.32bn, thanks to proceeds from project sales in Jiaxing and disposal of GenRx Holdings. This translated into gearing of 32%. Financial risk remains manageable in our view.
HKR plans to launch Villa Lucca in Tai Po, a 40/60 joint venture residential development with Hysan Development. This project contains 262 units including 41 houses with 0.5msf GFA. The consortium bought the two sites where Villa Lucca is built on via government tender for HK$3.39bn in total in Nov-16. Including construction and financing costs, we estimate total development costs at HK$15,700psf on saleable area basis. Our analysis suggests a complete sale would generate attributable pre-tax profit of c.HK$1bn to HKR, making it a near-term development earnings driver.
Trading 84% below our appraised current NAV, the stock is attractively valued. The current low valuation should limit any further downside risk on share price. A strong reception to the impending launch of Villa Lucca in Tai Po could be a catalyst. More importantly, HKR has been optimizing its asset mix for long-term growth which should bode well for its valuation in the future. By assigning a target discount of 75% to our Jun-2023 NAV estimate, we derive our TP at HK$4.76, and hence our BUY call.