FY15 results in line, reflecting higher y-o-y contributions fromHK and China rental as well as property trading
Upcoming catalysts in 2016 include openings of HKRI TaikooHui in Shanghai and Brickell City Centre in Miami (in phases)
We have a Buy rating and a target price of HKD32
Strong HK office portfolio: Swire Properties (SPL)’s FY15 results reflected goodmomentum from the HK office portfolio, including high occupancy (+2pp y-o-y to 99% as ofend-2015), higher spot rents at Pacific Place (PP) and Taikoo Place portfolios, particularlyat One/Two PP where spot rents rose to HKD110-125psf (from HKD95-110psf a yearago), and positive rental reversions (6-15% in FY15, except for Pacific Place’s -1% whichare expected to turn positive in 2016). The strength of the HK office portfolio, together witha low portion of office leases expiring in FY16 (representing 11% of rental income), shouldunderpin SPL’s operations in 2016, despite macro uncertainties and risks to retail rentalfrom slowing retail sales in HK, in our view. Meanwhile, Taikoo Place redevelopment willserve as a medium-term growth driver on completion in phases from 2018. With 50% ofgross asset value contributed by HK office assets, we expect SPL to benefit from therelatively resilient rental in the HK office market in2016.
Good momentum outside HK: SPL made good progress with pre-leasing of the 50%-owned HKRI Taikoo Hui in Shanghai, with around two-thirds of retail and office areacommitted ahead of opening in phases from August 2016. In March 2016, SPL openedone of the office towers at Brickell City Centre in Miami, of which project completion willcommence in phases from 2016. Separately, SPL’s China rental portfolio showed goodmomentum in FY15, including +14% y -o-y attributable gross rental (including JV andassociates) and +3-30% y-o-y retail sales across malls in Beijing and Guangzhou.
FY15 earnings in line, excluding one-off items: SPL reported FY15 underlying earningsof HKD7,078m, -1% y-o-y. Excluding losses on UK hotel disposals, adjusted underlyingearnings rose 2% y-o-y to HKD7,307m, largely in line with our and consensus estimates.The y-o-y earnings growth reflects higher property sales and +3% y-o-y net rental. SPLdeclared a second interim DPS of HKD0.48, bringing the total DPS to HKD0.71, up 8%y-o-y and implying a payout ratio of 57% (higher than FY14). SPL reported book NAV ofHKD36.97, up 1% h-o-h, and gearing of 15.3%, -0.4pp h-o-h, as of end-2015.
We have a Buy rating and a target price of HKD32: Our fair value target price isbased on a 30% NAV discount to our NAV estimate of HKD46, benchmarked againstHongkong Land’s NAV discount at 0.5 standard deviations below the historicalaverage, given the short trading history of Swire Properties. SPL stock trades at a55% NAV discount. Key downside risks include lower-than-expected rental achieved,should volatility in financial markets persist, potentially dampening office demand,and/or higher cap rates driven by rising US long-term bond yields.