EUR 850.00 For Business Accounts Only

Morningstar | Positive Momentum Sustained in the 2H for Swire Pacific

The key highlight to Swire Pacific’s preclose meeting was that overall positive momentum from the first half of 2018 was sustained in the second half, albeit at a slower pace, and our thesis for the conglomerate is unchanged. We continue to see the group’s diversified businesses across multiple geographies as resilient in weathering economic downcycles. This is supported by management’s prudence with recurring income from Swire properties and the beverage division offsetting the more cyclical aviation and marine services divisions, underpinning dividend for the group. Acquisitions in properties and beverages are most prospective though management noted valuation in land auction in Hong Kong remains elevated while general asset prices is high. Our fair value of HKD 87 is unchanged along with our 3-star rating.

Swire properties remain the key driver for the conglomerate and management noted retail sales at its flagship malls in Hong Kong continue to perform well, despite slowing retail sales growth in Hong Kong. Office rental at Pacific Place was secured at a range of HKD 130 to HKD 160 per square feet per month, in line with the buoyant office rental market in Hong Kong. Growth for the division is underpinned by projects in Hong Kong in the medium term and the group is looking for further investments. However, the latter is limited by the still demanding valuation. We expect its Mainland China to perform well in the second half of 2018 and our recent visits to Taikoo Li in Chengdu and Taikoo Hui in Shanghai reaffirm our view of strong management execution and the group’s ability to transform and develop certain sites into prime destinations. Despite softer consumer sentiments in China, retail sales growth its properties remain in the midteens.

Better pricing saw revenue for the Beverage division increasing ahead of volume. This was driven by an improvement in product mix as higher pricing per serving resulted from an adjustment in product content. Better co-ordination of pricing after the realignment of the franchises in China also contributed. Further improvement in product mix is expected with new categories such as energy drink expected to lift profitability going forward. Unsweetened tea small but growing. Management reaffirm its earlier strategy in investing in products, logistics and digital to drive growth. On costs, higher raw material is expected to pressure margins in the second half.

Improvement in the aviation business was sustained in the second half with Cathay Pacific seeing higher yields and capacity volume. Year-to-November passenger load factor was steady at 84.1% while cargo and mail load factor saw 1.5% increase to 68.9%. Fuel surcharge was implemented in November last year to offset rising fuel costs while stronger USD is a headwind for earnings in the second half. While margins and work volume has improved in HAECO America, the business will remain loss making for the year. Work volume for engine maintenance HAESL has improved and performance is expected to be stable for the full year.

Marine Services, or SPO, remains challenging due to lower charter rates. This was offset by slightly higher utilisation rates. With the oil price unable to sustain remain at elevated levels, oil majors are unlikely to invest aggressively into new offshore exploration projects. According to data from Baker-Hughes, the number of rigs steadied in the second half. We continue to expect day rats and utilisation rates to be pressured in the medium term. Further, SPO’s costs are unlikely to be lowered further after earlier restructuring in the business. Management noted the operation is cash flow positive with the majority of expenses attributable to depreciation.

While contribution from the trading and industrial divisions is small, restructuring is ongoing in the division with the most recent disposal of the paint business and earlier the cold storage business.