Link REIT –
Closing price: 39.55
Target price: 37.20
NPI margin further improved, better-than-expected interim results
1HFY14 results beat expectation due to margin improvement: Link REIT’s interim DPU came in at HK$80.22 cents, up 12.9% YoY, beating market consensus and was 3.6% higher than our estimate. It was mainly due to the better-than-expected net property income margin. Revenue in 1HFY14 climbed 9.3% YoY to HK$3,493 mn.
We want to highlight that car parks rentals had a faster revenue growth of 14.1% YoY than retail rental’s 8.8%, due to higher utilization rate of car parks. The net property income margin improved to 72.1%, up 1.5 ppt YoY/ 0.8 ppt HoH, mainly due to the better cost control (utilities expenses dropped 4.4% YoY through energy management measures, repair and maintenance costs declined 3.9% YoY). NAV increased by 23.4% YoY or 6.6% HoH to HK$38.04 on higher net property income and cap rates were broadly the same. Gearing ratio dropped to 11.6% from 13.6% as of end-Mar 13.
Execution ability remained strong: Link REIT remained a high occupancy rate of 94.1%, while the rental reversion rate (on an average 3-year lease) declined slightly from 25.9% in 1HFY13 to 23.6% in 1HFY14. The average monthly unit rent climbed 8.1% YoY to HK$40.2 psf.
Tenants’ retail sales growth remained healthy: Link REIT’s overall tenants’ gross sales YoY growth rate was 9.3%, down 2.3 ppt compared to 1HFY13, but it is better than our expectation and we consider it as a healthy level to support the retail rentals. For the F&B segment, the growth rate was 13.3%, faster than 1HFY13’s 9.3%. But for the supermarkets & foodstuff segment, growth rate slowed sharply from 11.3% in 1HFY13 to 5.2% in 1HFY14. Management attributed it to a high base effect.
Key points from interim results presentation: Management mentioned they are studying expansion into China to add inorganic growth. But they have to change current mandate, which restricts investment outside HK, before the potential expansion. We think neutral as we agree that it can capture the increasing no. of middle-class in China and acquisition to add inorganic growth is a good move under Link REIT’s low gearing ratio, but there are many uncertainties as Link REIT has no presence in China so far.
Link REIT spent capex of HK$415 mn in 1HFY14, management said they will maintain the same capex target of HK$600-800 mn per year for the AEI projects.
Valuation: We revised up DPU estimates for FY14 and FY15 by 2.4% and 1.1% on higher revenue growth and net property income margin. Our new DDM based target price was HK$37.20, representing 5.9% downside potential from last closing price. Our target price implies forecast dividend yield of 4.4%, close to 5-year average of 4.44%, which we think more reasonable for investors amid the interest rate hike expectation.
Publish date: 18/11/13