Steady earnings growth expected in 1H15. Hysan will report 1H15 results on 5 August. We forecast 1H15 earnings (excluding revaluation gains) of HKD1,139m, up 5% y-o-y mainly reflecting positive rental reversions, which we estimate to drive net rental 5% higher y-o-y. Our 1H15 earnings estimate represents 49-50% of ours and consensus FY15 full-year earnings estimates, respectively. We forecast 1H15e DPS of HKD0.26 (vs 1H14’s HKD0.23), implying a payout ratio of 24% (vs. 23% in 1H14).
Resilience in retail rentalamid sector headwinds.Despite the sluggish overall retail sales trends in HK (-1.6% y-o-y in 1H15 by value), we expect Hysan’s portfolio to deliver continuing positive retail rental growth given 1) the high portion of rental locked in by base rents, with turnover rent accounted for 5% of total retail rent in FY14; and 2) the diversity within Hysan’s retail rental portfolio in terms of tenant trade mix and shoppers (including tourists and locals).
Key investors focus during results briefing, in our view, will include 1) management outlook for the HK retail rental market and the latest retail sales trends in Hysan’s portfolio; 2) updates on tenant mix enhancement at Hysan Place which will enter the second leasing cycle in August 2015; 3) progress of Sunning Plaza and Sunning Court redevelopment, with target completion by around 2018; 4) Hysan’s leasing strategy for office space at Lee Garden One, which will be vacated by end-2015 by a major tenant and 5) Hysan’s potential acquisition plans.
We have a Hold rating and a target price of HKD40. Our unchanged target price of HKD40 is based on a 42% discount to our NAV estimate. Our target discount is based on a 0.5 standard deviation below the historical average. We expect steady rental growth from Hysan’s rental portfolio although with 47% of its GAV contributed by HK retail assets we expect market concerns over slowing retail sales in HK to remain a near-term overhang on Hysan’s stock .Key upside risks include higher rental and asset values achieved upon the redevelopment of Sunning Plaza/Sunning Court, which are yet to be reflected in our NAV estimate. Key downsiderisks include an increase in Hong Kong commercial cap rates.