What surprised us
Fortune REIT reported 3Q15 revenue of HK$470mn, up 12.9% yoy, driven by additional contributions from Laguna Plaza (from Jan 9 onwards) as well as 8% yoy growth in average passing rent for the original portfolio. DPU of HK¢11.54, up 12.0% yoy, was in line with our HK¢11.78 estimate.
Takeaways from briefing:
(1) Rental: 2015 YTD’s reversion rate was at 21.8%, implying c.23% in 3Q, and management reiterated full-year guidance of 15-20% (24% in 2014) as they expect non-discretionary spending sectors, which account for 57% of rentals, will continue to deliver resilience performance amid a relatively weak market.
(2) AEIs: Fortune expects to complete HK$80mn Belvedere project soon, with committed occupancy reaching 94.9% and an estimated ROI of over 20%. However, on Kingswood front, AEI is still pending government approval and the company is hopeful it will commence in 2016.
(3) M&A: Management sees c.HK$2.5bn debt headroom for M&A (30.4% debt-to-asset as of Sep 2015 vs. regulatory ceiling of 35% without credit rating) in HK retail and sees a strong pipeline from its parentco Cheung Kong Prop (1113.HK, Buy, HK$52.55 Nov 2 close), but gave no guidance on timing and specifics.
What to do with the stock
Fortune’s pace of rental growth has been highly resilient and we believe it will continue, driven by steady growth in non-discretionary local spending. On the proposal to change its listing status on SGX Main Board from primary to secondary whilst retain its primary listing on SEHK, management plan to release a circular in due course. We fine tune our 2015E-17E EPS by 0.3%-2.7% with new DCF-based 12m TP of HK$7.85 (from HK$7.70) (WACC 7.2% and TGR 2% unchanged). It trades at 5.9%/5.9% 2015E/16E dividend yield. Risks: Better-than-expected AEIs uplift; lower-than-expected reversion. (Read Report)
Read Related Reports
1) Fortune REIT - A safe bet in this volatile market by DBS Group Research, published on 4 November 2015
2) Fortune REIT - Still showing resilience by Daiwa Capital Markets, published on 3 November 2015
Source : Goldman Sachs Equity Research