Core earnings up 10% YoY; higher than our UBSe by 4%
SHK Properties (SHKP) interim FY15/16 earnings, after excluding net revaluation gain,grew by 10% YoY to HK$9,298m or EPS of HK$3.23. Earnings growth is generatedfrom higher rental earnings in HK & China. The company lifted its interim DPS by10.5% YoY to HK$1.05, the first time in last 5 years. The divi represents a payout of33% on core earnings, up 2ppt YoY. In addition, management indicated that they areconfident of the earnings growth prospects in H2 and is likely to deliver a similardividend growth of 10.5% YoY in final results. We think such a move serves a goodvote of confidence.
Lower HK contracted sales by 15% YoY to HK$27bn
Management revised down the full year HK contracted sales by 15% YoY to HK$27bbut retained China contracted sales at HK$5bn. The revision of HK sales target is drivenby the delayed construction of a residential project (Grand YOHO) and the slowingproperty sales in HK. The company already secured 80% of FY2016 plannedcompletion. Hence, we believe FY16 property development earnings should not beimpacted even if H2FY16 property sales turns out to be weaker than expected.
Rental reversion remained as 20%; office stronger than retail
SHKP's rental earnings from the HK and China portfolio increased by 7.5% YoY and itstotal rental earnings amounted to 61% of H1 +EBIT. The company's rental reversionreported to be 20%, of which HK office reversion is stronger than that of retail. Thepotential higher FY16 DPS amounted to 88% of rental earnings, implying there is stillroom for further expansion of its dividend payout.
Valuation: Currently trading at 45% NAV discount
We hold Buy rating on SHKP with a PT of HK$120.53/sh. based on a 25% discount toNAV. We favour SHKP for the high rental earnings base that can support the expectedhigher dividend payment to increase by 10.5% YoY. We believe management'scommitment to lift divi should help mitigate the weaker HK market outlook ahead.