EUR 850.00 For Business Accounts Only

Morningstar | Kerry Properties' Full-Year Results a Miss due to Exceptional Items, Underlying Operations on Track. See Updated Analyst Note from 17 Mar 2019

Kerry Properties reported full-year core earnings of HKD 3.3 billion, down 50% year on year and 15% below our estimate. The miss was attributed to the fair value loss of investment in a subsidiary in Shanghai. Excluding that, property rental was broadly in line. While property development revenue was lower than projected, higher margin partially offset topline weakness. Full-year dividends totaled HKD 1.35 per share, same as a year ago excluding the special dividend. We maintain our no-moat rating for the company and our fair value estimate of HKD 33.

Revenue was down 40% year on year, which was attributed to the booking of HKD 7 billion in Hong Kong, about one third of the amount a year ago. The booking was partially affected by an accounting change, resulting in the deferral of a portion of the revenue. But gross margin for the segment rebounded from 15% to 34%, slightly above historical average. The revenue was mostly from the booking of Mantin Heights and Bloomsway, which achieved higher prices in later phases. In China, development property revenue came in at HKD 7.5 billion, down 11%. the margin was steady at 32%. During the year, the company achieved contracted sales of HKD 8.4 billion in Hong Kong and HKD 6.7 billion in China.

Rental assets in Hong Kong held firm with the top line growing 6% year on year, along with steady margin. In China, rental turnovers are up 7% also with steady margin. Both portfolios were stable during the year, with combined recurrent earnings up 7% year on year. The hotel segment saw revenue up 10%, but gross margin declined 200 basis points to 19%.

Net gearing declined to 17% at the end of the year, down from 23% a year ago. This was expected given the light land banking activities in 2018 across both China and Hong Kong. We project gearing to decline further in the near term assuming no major acquisitions.

The dividend payout ratio was higher at near 60%. If excluding the impact of one-off noncash items, the ratio is in line with the past year at 32%. The stable dividend payout reflects the steady performance of the ongoing operation. Given the improving sentiment in the Hong Kong property sector and the company’s current thin project pipeline, the company will likely become more active in the Hong Kong property sector in 2019.