EUR 850.00 For Business Accounts Only

Morningstar | Full-year Results a Slight Miss, Capital Recycling in Focus Going Forward

Swire Properties reported full-year underlying earnings of HKD 10.1 billion. Excluding the disposal gain, the recurring underlying earnings totaled HKD 7.5 billion, up 4% year on year. The results were slightly below our estimate. The shortfall was due to the lower than projected booking of development properties. Full-year dividends totaled HKD 0.84 per share, up 9% year on year. The investment properties portfolio performed slightly better than expected, driven by a positive reversion of Hong Kong assets and continued growth of retail assets in China. We believe both segments will continue to perform well after the ramp up of One Taikoo Place in Hong Kong and the company’s portfolio of quality retail assets in China benefiting from consumption growth. We make no changes to our narrow economic moat rating and maintain our fair value estimate of HKD 30.

On the property investment side, gross rental income totaled HKD 12.3 billion, up 7.7% from a year ago, while operating income was at HKD 8.6 billion, up 5.3% year on year on a steady margin.

In Hong Kong, the turnover from the office portfolio totaled HKD 5.9 billion, up 4% from a year ago, supported by positive rental reversion and firm occupancy in a strong office market. Full year contribution from One Taikoo place in 2019 should boost earnings. On the retail side, turnover was 6% higher at HKD 2.8 billion this year. For the full year, retail sales were up 12% at Pacific Place, while Citygate and Cityplaza registered gains of 4% and 6%, respectively. With lease expiry of 18% and 24% in the next two years, we expect modest low single digit rental growth ahead.

In China, the rental portfolio continued to perform well. Including several larger joint ventures, attributable rental income was near 20% to HKD 4.0 billion. In local currency, the increase was 17% with most assets seeing positive rental reversions and higher occupancy rates from a year ago. Retail sales growth has slowed from the torrid pace seen a year ago, but still strong at low teen range for most assets. The continued growth of these assets, along with the uptake of HKRI Taikoo Hui in Shanghai, should further increase the top line in 2019.
Brickell City Center in Miami has ramped up to 89% occupancy for retail space and fully occupied for office as of end of the year, with retail sales more than double, albeit from a low base.
On the property trading side, revenue and operating profit were much lower due to the small project pipeline, at HKD 1.1 billion and HKD 65 million, respectively. The company now has limited sellable resource in the pipeline, and property trading is not going to be a large contributor to earnings until 2023 and beyond. The hotel segment performance was similar to a year ago, with slightly higher revenue and a smaller loss for the year.
Net gearing edged lower to 10.6%, compared to 13.6% at the end of 2017. The balance sheet was strengthened by further cap rate compression of Hong Kong office portfolio, resulting in revaluation gain of HKD 19 billion. Depending on new project investments, the gearing should drop further in 2019 due to the completion of Cityplaza Three and Cityplaza Four disposal. Capital expenditures are expected to be modest in the near term, averaging HKD 3.5 billion over the next three years. Financing remains cheap, with effective interest rates remaining below 3.5%. Dividend payout was in line with the stated policy of 50% of underlying earnings which were boosted by the disposal gain from the sale of Kowloon Bay office project. Management said it will invest the disposal proceeds in new projects, while maintaining sustainable dividend growth.