Price Target : 12-Month HK$ 8.02 (Prev HK$ 8.00)
Kingswood Ginza – full potential yet to be exploited
Proposed acquisition of Kingswood Ginza property, funded mostly by debt with the balance from unit placement, is yield accretive
Diversified tenant base with defensive trade mix point to resilient income for Kingswood Ginza property while rental upside should come from lease renewals and tenant repositioning
Maintain BUY with TP raised slightly to HK$8.02
Yield accretive acquisition to beef up the portfolio. Fortune REIT has proposed to buy Kingswood Ginza property in Tin Shui Wai with Gross Rentable Area of 665,244sf for HK$5,849m, which will be funded by new loans and proceeds from unit placement done earlier. This acquisition will boost its portfolio by 27% to 3.1m sf. Post acquisition, Kingswood Ginza will be Fortune REIT's largest asset in items of both GRA and valuation. Based on 1H13 pro-forma figures, the property to be acquired offers an annualised net property income yield of 3.8%. Assuming the acquisition and unit placement were completed in Jan 13, Fortune REIT's pro-forma DPU for 1H13 would have increased 4.7% to HK$0.1884. The acquisition would further diversify Fortune REIT's income and offer greater economies of scale and operating synergies.
Resilient income with scope for further rental upside. The property comprises mainly Kingswood Ginza Mall, the largest mall in Yuen Long district. It is well served by public transport with strong catchment area. Favourable rental growth is expected when c.46% of leases are up for renewals in 2014. Its diversified tenant base with defensive trade mix point to strong income resilience. We also see tenant repositioning and asset enhancement opportunities for this mall. With its close proximity to the border, Kingswood Ginza Mall should be able to tap on the growing cross border spending by Mainland shoppers.
Maintain BUY with TP raised slightly to HK$8.02. Factoring in this acquisition and unit placement, we have raised our FY14F DPU by 3.3% and our DDM-based TP slightly to HK$8.02 from HK$8.00. Fortune REIT offers distribution yields of 5.6% for FY13 and 6.2% for FY14. In view of enhanced long-term growth prospects and earnings resilience, we reiterate our BUY rating. Interest rate hikes, however, remains the key investment risk.
Publish date: 05/09/13