Investment Summary
- Quality occupancy and stable growth;
- Effective cost control measures facilitating net income;
- Payback debt saving financing cost and ease pressure from interest hike.
Business Overview
Stable growth in first half. Fortune REIT manages 16 commercial properties in Hong Kong, with the total valuation of portfolio reaching HKD40.78bn (up by 8% from 2017 end). In 18H1, Fortune REIT realized revenue of HKD978.1mn (+2.2% YoY) implying a 4.2% YoY growth if we exclude the effect of selling Provident Square. Operating income totaled HKD748.6mn which is growing by 3% or 4.2% excluding the disposal. Income attributable to distribution amounted to HKD505.2mn up by 3.7% YoY. Distribution per unit reached HKD26.34 cents representing 3.2% YoY growth, implying an annualized yield of 5.8%.
Quality occupancy performance
Fortune REIT maintains considerable occupancy rate outperforming the market average since listed in HK. Occupancy rate reached 98% in FY17 and 96% in 18H1 due to AEIs for Fortune Kingswood, for which the mall is under adjustment and renovation. We expect that occupancy will return to normal or even higher level after the accomplishment of AEIs. A rental reversion of 13.6% was recorded for renewals during 18H1 with the average rent of HKD45.9 per sqf. The tenant mix continues to diversify and over 60% rental income is from daily necessity industry.
AEIs facilitate future profitability
The company proactively progresses an asset enhancement to increase investing return. It launches an enhancement plan for Fortune Kingswood (which is set in 1996 with the total area of 665k sqf) and will be finaished at 2019 end. Fortune Kingswood is the largest shopping mall in Tin Shui Wai area and accounted for 18.4% of total revenue. Now the company is promoting enhancement project of West Tower with an expected cost of HKD150mn. After the reorganization and building, it is expected to attract more customers and improve management efficiency. Profitability is also going to rise after appropriate adjustment.
Disposal of Provident Square
The company sold out Provident Square at consideration of HKD1.988bn. The disposed value is 3.1 times its purchase price and 88% over its appraised value as at 30Nov 2017 after 5-year holding period. The deal results in a gain of HKD921mn after completion on 28 Feb 2018. The proceeds will be used in asset enhancement initiatives, debt repayment, etc.
Healthy finacial condition
The company increases financial flexibility and safety through selling out asset and prudential management of risk. It paid back HKD1.1bn debt and now the debt to asset ration only reaches 22.3%. Meanwhile, Fortune REIT has kept borrowing xost around 2.72% with the interest risk of 54% debt having been hedged.
Valuation & Risks
Our target price is HKD10.5. We highlight 1) As most of tenants are engaged in daily necessity business, the rental income is relatively stable and less impacted by any economic recession. 2) AEIs will be growth momentum to improve profitability. 3) healthy financial condition and appealing yield. Thus we give target price HKD10.5, implying 35% discount to NAV. Risks include: Interest hike drives up debt cost; AEIs plan fail expectations.
Financials
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