1HFY24: Results In Line; Ready For Unit Buyback
Link REIT declared an interim DPU of HK$1.30, down 16.4% yoy and representing 51% of our full-year estimate. Revenue and NPI growth were driven by: a) resilient Hong Kong retail and carpark portfolio, and b) new contribution from Australian & Sydney retail portfolio. NAV declined 4.4% while balance sheet strengthened. We think the high interest rate is well under the company’s control. Potential unit buyback will positively support stock price. Maintain BUY with a target price of HK$50.70.
RESULTS
• 1HFY24 results in line with our expectations. Link REIT declared an interim DPU of HK$1.30, down by 16.4% yoy, representing 51% of our full-year estimate. 1HFY23 revenue and NPI increased by 11.3%% yoy and 10.4% yoy respectively mainly thanks to: a) resilient Hong Kong retail and carpark portfolio, and b) new contribution from the retail portfolio in Australia and Singapore. NAV amounted to HK$ 70.72/share, down by 4.4% compared with Mar 23.
• Rental income grew 11% yoy. Income from Hong Kong retail grew by 2.8%, supported by an 8.7% rental reversion, which is in line with guidance. Mainland retail portfolio reported a 7.8% yoy decline in rental income, dragged by a 5.2% rental reversion of retail portfolio and RMB depreciation. International portfolio saw 245.1% yoy revenue growth, thanks to contribution from newly-acquired assets in Australia and Singapore.
• NAV declined 4.4% while balance sheet strengthened. Property valuation dropped by 3.8% hoh on expanded cap rate especially in the UK. On the other hand, total borrowing decreased by 9.1% or HK$6b. Average funding cost rose by 74bp to 3.7% which is still lower than bench market rates of major markets. The higher fixed debt ratio of 70% and RMB borrowing exposure helped ease the pressure of rising interest rates.
STOCK IMPACT
• Key takeaways from results briefing: a) management is cautiously optimistic about the retail portfolio, and expects negative rental reversion of the mainland retail portfolio to level out by end-FY24; b) management expects average funding cost to largely stabilise in the next 12-18 months, backed by high fixed-debt ratio and flexibility to increase low cost RMB borrowing; c) pricing gap in M&A market is narrowing, management will stay patient and wait for good deals; d) LINK REIT is ready for unit buybacks.
EARNINGS REVISION/RISK
• We keep our DPU forecast unchanged.
VALUATION/RECOMMENDATION
• Maintain BUY with an unchanged target price of HK$50.70. Our target price implies 5.0% FY24 dividend yield. Link REIT is currently trading at 6.6% FY24 dividend yield. LINK REIT’s resilient portfolio can support NPI growth, and high interest rate risks have been well under control. We think the company will regain growth momentum. The unit buyback plan will positively support stock price.
SHARE PRICE CATALYST
• Stronger-than-expected recovery of Hong Kong and China economies.
• China and Hong Kong governments introducing stimulus measures to boost consumption.
• Lower interest rate in the US.