Robust performance continues
- 4Q14 DPU rose 8.0% YoY
- Solid FY14 rental reversion of 23.8%
- Stock appears fairly priced
4Q14 results met our expectations
Fortune REIT reported another good set of results, with 4Q14 revenue and DPU increasing by 8.4% and 8.0% YoY to HK$425.7m and 10.5 HK cents, respectively. For FY14, revenue jumped 25.7% to HK$1,655.8m, due to robust rental reversion of 23.8% and a full year of contribution from Fortune Kingswood (rental reversion in excess of 30%). Its portfolio passing rent increased by 8.7% to HK$36.4 psf pm. FY14 DPU of 41.68 HK cents translated into a growth of 15.8%, and formed 99.8% of our full year forecast. Results were within our expectations. All of Fortune REIT’s assets recorded an increase in their valuations ranging from 2.7% (Rhine Avenue) to 13.9% (Fortune City One).
Contribution from Laguna Plaza to further boost growth
Fortune REIT recently completed the acquisition of Laguna Plaza on 9 Jan 2015 for HK$1,918.5m (4.7% passing initial yield). This was fully funded by debt and the asset is expected to form synergies with Fortune REIT’s Centre de Laguna which is located at close proximity. We expect Fortune REIT’s gearing ratio to reach 33% at end FY15, versus 29.4% as at 31 Dec 2014. This is still a healthy level, in our view. Following this acquisition, Fortune REIT’s total debt hedged will ease from 55% to 46%.
We raise our FY15 DPU forecast by 5.4% to take into account the acquisition of Laguna Plaza and also introduce our FY16 projections. Rolling forward our valuations, we bump up our fair value estimate from HK$7.29 to HK$8.05. While we like Fortune REIT for its resilient portfolio as 57% of its gross rental income is derived from the nondiscretionary retail sector, we believe the stock appears fairly priced, having appreciated 7.4% YTD. Our forecasted FY15F distribution yield of 5.4% is more than one standard deviation below its 5-year average forward yield of 6.4%. Maintain HOLD.
CAPITALIZE ON OVER-REACTION
- Dip from Fed fears and profit-taking
- Selling likely overdone
- Prefer Starhill, CCT and Fortune
Interest rate fears hitting S-REITs sector
We see two key factors driving the dramatic correction in the S-REITs sector over the last two weeks. First, increased expectations that the Federal Reserve could taper its bond purchases as early as 2H13; and secondly, the market going into opportunistic profit-taking on the back of a strong performance over 2012-13. At this juncture, however, we see the selling to be overdone. The S-REITs sector has nearly relinquished all of its YTD gains; the FSTREI was up 13.5% YTD on 15 May 2013 is now up only 1.6% YTD as at 3 Jun 2013. We would now selectively bargain hunt for REITs with firm fundamentals and good potential for DPU growth.
S-REITs’ valuations undemanding
In our view, the odds of the Fed tapering bond purchases in 2H13 are roughly 50-50 and we see fundamental valuations for the S-REITs sector to be undemanding currently. The S-REITs sector is trading at a market-cap weighted spread of 370bp against the 10Y government bonds, which is still attractive versus the 4-year average of 430bp and also versus other major REIT markets, such as Hong Kong (280bp), Japan (310bp) and Australia (200bp).
S-REITs benefiting from strong fundamentals
We see S-REITs delivering firm financial performances in 2013 from asset enhancement initiatives/development projects, yield-accretive acquisitions and active leasing efforts. For our coverage, we expect the S-REITs to post 6.6% growth in aggregate DPU for the current fiscal year, before experiencing another 8.6% growth in the next year.
Selectively bargain hunt
Given current valuations, we maintain our OVERWEIGHT rating on the S-REITs sector and advocate for bargain hunting for S-REITs with good growth potential, strong financial position and compelling valuations (relatively lower P/B and decent DPU yields). Starhill Global REIT [BUY, S$1.05 FV] is our top pick in the sector due to its growth potential, strong fundamentals and compelling valuations. We also like CapitaCommercial Trust [BUY, S$1.80 FV] and Fortune REIT [BUY, HK$8.64 FV] for the quality of their portfolio assets, positive rental reversion profiles and low gearing.
- HK sales rebound
- No impact from proposed Park’N Shop boycott
- Maintain BUY
Good HK retail sales
The growth in HK’s retail sales has picked up significantly since 4Q12. Combining the first two months of 2013 to eliminate distortions from the timing of Chinese New Year, retail sales climbed up 15.8% in value and 15.5% in volume. According to a government official, the generally stable labour market conditions and vibrant tourism should continue to lend support to retail business in the near term, although there are still notable headwinds on the external front. Provisional statistics from the HK Tourism Board indicate that the tourism expenditure associated with inbound tourism grew 16.5% YoY in 2012 to HK$306.5b. In contrast, Singapore’ retail sales fell 2.0% YoY in Jan 2013, and tourism receipts grew by only 3% YoY to S$23b in 2012. Robust retail sales will continue to underpin the growth in retail rents throughout HK.
No worries over call for Park’N Shop boycott
The media has reported that a group has called for the boycott of Park’N Shop supermarket chain, which is part of Li Ka-shing’s Hutchison Whampoa Ltd, in support of dock workers who are striking for better work conditions. The workers are employed by Hongkong International Terminals (HIT) either directly or through contractors. HIT is a subsidiary of Hutchison Port Holdings Trust, which is owned by Hutchison Whampoa Ltd. Park’N Shop is FRT’s top tenant, accounting for 8.0% of the REIT’s total gross rental income in Dec 2012. According to FRT management, the incident is not affecting FRT malls. Businesses are running as usual and impact to the sales of the Park’n Shop outlets in FRT’s malls has not been seen.
Another solid year ahead
Overall rental reversion in 2012 was high at 19.8%, partially because of the low base in 2009. Management has indicated that 2013’s rental reversions are likely to be in the mid-teen percentages. It is worthwhile emphasising that FRT has a low gearing of 23.4% and no refinancing needs till 2015.
We are maintaining our fair value of HK$7.28 and BUY rating on FRT. FRT is trading at a low P/B of 0.78x.