Dividend cut to conserve cash
- Hysan’s FY23 underlying profit fell by 17% yoy, dragged down by a decline in total revenue, margin contraction, as well as higher interest expenses.
- Hysan cut its dividend to HK$1.08 (-25% yoy) in a bid to conserve cash due to the uncertain operating environment and future investment opportunities.
- We expect retail revenue to recover gradually in FY24F. Meanwhile, we think its office portfolio would continue to see negative rental reversion in FY24F.
- We cut our TP as the NAV discount is widened by 5% pts. But we reiterate Add as Hysan is one of the key beneficiaries of recovery in HK retail sales.
FY23 underlying profit down 17% yoy, dividend cut by 25% yoy
Hysan Development’s underlying profit for FY23 (after distribution of perpetual capital securities, PCS) fell by 17% yoy to HK$1,390m, dragged by a 7% decline in total revenue, a 3%-pt margin contraction, as well as higher net interest expenses. It declared a full-year dividend of HK$1.08 (-25% yoy), with an 80% underlying payout ratio. Management explained that the dividend cut (Hysan’s first since 2002) was necessary to conserve cash to prepare for the uncertain operating environment and possible future investments.
Retail revenue should recover gradually
Retail rental revenue dropped 10% yoy in FY23, mainly due to ongoing asset enhancement initiatives (AEI) at c.10% of Hysan’s retail areas in Hysan Place and Lee Garden One. Meanwhile, turnover rent rose by 45% yoy in FY23, thanks to retail sales growth among its luxury goods tenants, with occupancy falling slightly to 97% at endFY23. Management guided for positive rental reversion in FY24F, driven by the renovated areas after AEI completion. Overall occupancy cost was at 15% in FY23, which provides room for Hysan to increase rents further, in our view.
Negative rental reversion and a slight drop in office occupancy
Revenue from office space declined by 7% yoy in FY23, with end-FY23 occupancy at 89% (-1% pt yoy). Rental reversion for its offices was negative in FY23. With an oversupply of office space in HK due to new completions in decentralised districts, we think rental reversion for Hysan’s offices would stay in negative territory in FY24-25F (management said rent levels for leases expiring in 2024 are likely to be similar 2023’s).
Reiterate Add with a lower TP of HK$14.9
We reiterate Add on Hysan with a lower TP of HK$14.9, based on a 70% discount to NAV of HK$49.8 (discount widened by 5% pts to reflect longer-than-expected profit recovery and dividend cut). We still see Hysan as a key beneficiary of a recovery in HK retail sales, as its Lee Gardens and Hysan Place malls remain key shopping destinations for both Chinese visitors and HK locals. Potential catalysts are stronger-than-expected retail sales and rental reversions. Key downside risks include higher-than-expected vacancies for its HK office space, and lower-than-expected portfolio occupancies.
