Maintain Buy on good earnings visibility/secure dividend; raising TP to HK$23.2
We maintain Buy on Kerry Properties with a target price of HK$23.2. In ourview, the key highlight of the FY15 results was the strong growth in recurringincome, driven by new project completion and higher occupancy. We believethe established IP portfolio (still with room to grow on upcoming newcompletions) provides good earnings visibility and, more importantly, supportsa secure dividend stream that is fully covered by rental income. In particular,we expect absolute dividend in FY16-18 to remain at current level (HK$0.9/shr),immune from the anticipated earnings decline from falling ASP/rentals.
FY15 core net profit -7% YoY to HK$3,481m; in-line with our expectation
Kerry reported FY15 revenue -29% YoY to HK$10,393m on a 51% YoY declinein property sale revenue. Nevertheless, IP portfolio and hotels registered strongperformance on improving occupancy in China. Gross margin saw a marked4.7ppt decline to 37.6%, dragged by impairment in China. Meanwhile, thedecline in headline profit was less severe, boosted by a 55% YoY increase inassociates’ contribution. Excluding revaluation gains, core profit softened by7% YoY to HK$3,481m, in line with our expectation. A final dividend ofHK$0.6/shr was declared, bringing FY15 dividend to HK$0.9/shr (flat YoY).
Total leasable area rose to 11.3m sf; China IP up by 87% in size since 2006
As of end-15, Kerry has a total leasable area of 11.3m sf, with its China IPhaving increased by 87% since 2006. Consequently, rental revenue has alsogrown markedly to HK$3,801m in FY15 (from just HK$962m in 2006),particularly boosted by the opening of the Jing An Kerry Centre in 2013/14. Inour view, this established IP portfolio should support a steady dividend goingforward regardless of volatilities in development bookings. Our projected DPSfor FY16-18 is based on dividend payout of c.45% of core earnings even byfactoring in ASP/rental declines, and such a range is in line with industryaverage. Moreover, such dividend is fully covered by recurring income.
Target price at 45% discount to our estimated NAV of HK$42.14/share
Our target price of HK$23.20 is based on a 45% NAV discount to our estimatedNAV of HK$42.14/share, which implies 2016E PER of 11x. Our target discountis mostly on par with its historical discount to NAV, which is markedly steeperthan industry leaders as to reflect Kerry’s slower asset turnover, lower marketcapitalization and less-proven execution capabilities, which we believe isappropriate. Risks: rate hike and fluctuations in HK/China economies.