Moderate earnings growth expected in FY15e on higher rentaland property sales
Investors will likely focus on office demand, retail sales trendsin HK and pre-leasing of HKRI Taikoo Hui in Shanghai
Lower target price to HKD32 (from HKD34) assuming a widertarget discount
Moderate FY15e earnings growth. Swire Properties will report FY15 results on 10March. We expect FY15 underlying earnings (excluding revaluation gains) ofHKD7,504m, up 5% y-o-y reflecting slightly higher contributions from both propertysales and rental (+5% y-o-y net rental growth). Our FY15e earnings estimate is in linewith consensus estimates of HKD7,461m. We forecast FY15e DPS of HKD0.67 (vsFY14’s HKD0.66 and also in line with consensus estimates), implying a payout ratioof 52% (vs. 54% in FY14). In 2H15, we expect property sales contributions mainlyfrom Arezzo (112 of 127 units sold with sales of 96 units recognized in 1H15),Argenta and Whitesands in HK.
Key investor focus during results briefing, in our view, will likely include 1) latesttrends in HK office demand following the recent volatility in financial markets; 2) retailsales in 2M16 and occupancy cost trends at Swire Properties’ retail assets in HK whichrecorded retail sales trends of +0.7% to -11.8% y-o-y in 2015; 3) pre-leasing updates ofupcoming commercial projects, especially HKRI Taikoo Hui in Shanghai (completion from2016); 4) performance of the China rental portfolio (accounted for 19% of total rental in1H15); and 5) residential sales strategies in HK for the upcoming launch, Alassio.
We have a Buy rating with a revised target price of HKD32 (from HKD34). Wetweak our FY16-17e earnings down by 1-3% reflecting updated HK residential salesin 2H15. Our NAV estimate remains unchanged at HKD46. Our revised TP reflects awider target discount of 30% or 0.5 standard deviation below HKL’s historicalaverage (from 26% or 0.25SD below average reflecting increased uncertainties in theHK office market). With 50% of gross asset value contributed by HK office assets, weexpect SPL to benefit from the relatively resilient rental in the HK office market in2016 although the HK office market outlook could be affected should volatility infinancial markets persist, potentially dampening office demand. SPL stock trades ata 54% NAV discount. Key downside risks include lower-than-expected office rentsachieved and/or higher cap rates driven by rising US long-term bond yield.