Result Update: Share buybacks to continue
Despite marginally lower rental earnings, Hongkong Land’s 1H22 underlying profit rose 8% to US$425m thanks to higher development profit. The result was 14% above our forecast due to higher-than-expected booking of residential development profits. Interim DPS, however, remained flat at US$0.06.
YTD, Hongkong Land has repurchased 59.7m shares from the market. This brought the cumulative number of shares repurchased since it announced its share buyback program in Sep-21 to 96.1m, reducing its issued share capital by c.4%. While the current share buyback is close to an end, Hongkong Land has earmarked another US$500m for a new share buyback program which should last until the end of 2023. This should drive its share price performance in the near term. Based on the current share price, the company could repurchase up to 103m shares, representing c.4.6% of its existing outstanding shares.
Gross rental receipts were 3% lower dragged by reduced office and retail income. Reversionary growth for its Central office portfolio remained negative given higher expiring rents. This resulted in average office passing rents falling 5% y-o-y to HK$112psf. Vacancy stood at 5.4% in Jun-22, up slightly from Dec-21’s 5.2%. On a committed basis, the office portfolio was 94.9% leased (Dec-21: 95.1%). In response to tightened social distancing measures led by the Omicron variant outbreak at the beginning of the year, the company granted temporary rental relief to affected tenants, F&B tenants in particular. This, coupled with negative base rental reversion, led to average retail passing rents declining by 6.7% y-o-y to HK$168psf. Despite the COVID resurgence, its retail portfolio remained virtually fully let. Footfall and tenant sales in the Beijing and Macau retail portfolios were negatively impacted by pandemic-related restrictions.
Its Singapore portfolio fares better with continued positive reversionary growth. As a result, average passing rents rose 2.9% y-o-y to S$10.5psf. On a committed basis, the portfolio’s vacancy rate remained stable at 3% in Jun-22. (Dec-21: 2.9%)
Including contributions from associates and joint ventures, development earnings was 57% higher y-o-y resulting from more sales completions in the period. Due to subdued demand driven by pandemic-led lockdowns and restrictions, Hongkong Land’s attributable contracted sales in China tumbled 69% to US$419m.
Despite weak market sentiment, a consortium in which Hongkong Land has a 34% stake acquired a primarily residential site adjacent to the West Bund project in Shanghai for Rmb4.73bn. This will comprise of six residential blocks with >470 units. Hongkong Land has an attributable developable area of 18,700sm.
As of Jun-22, the company’s sold but unrecognized contracted sales stood at US$2.43bn. But COVID-led lockdowns have disrupted the construction progress of Galaxy Midtown project in Shanghai with project completion expected to be delayed from the end of 2022 into early 2023. This could possibly postpone the profit booking schedule and substantially weigh on the development earnings in near term. Development activities at West Bund mixed-use development has also been suspended for two months.
In Singapore, Hongkong Land’s attributable contracted sales amounted to US$270m, up 57% y-o-y. Launched in May-22, Piccadilly Grand has received strong market response with 75% of total 407 units already sold. The company acquired a 49% interest in a residential site in the Tanjong Katong area which is expected to provide 638 units with developable area of 599,000sf.
Net debt increased to US$6.1bn in Jun-22 from Dec-21’s US$5.1bn due to lower sales proceeds, land premium for recently acquired development sites and share buyback. This translated into gearing of 18%. Allowing for a new round of share buybacks, gearing would rise to c.20%. Financial risk remains manageable. Interest cost for 55% of total debt is at fixed rates with an average hedge tenor of 7.3 years. This helps mitigate the impact of interest rate hikes on earnings.
YTD, shares of Hongkong Land have fallen 7%. Meanwhile, the stock is trading at 58% discount to our appraised current NAV, against its 10-year average of 42%, The current valuation remains undemanding. The extension of share buyback program should prompt share price appreciation in near term. We raised our TP by c.3% to US$6.14 to reflect the impact of its new share buyback program. This is based on 50% discount to our Jun-2023 NAV estimate. BUY.