Fortune REIT has a portfolio of 16 suburban retail malls in HK, of which two were recently acquired in Feb 2012. We are positive on the HK retail sector given the continued growth of the economies of HK and mainland China. Rents will continue to climb to catch up with the rapid rise of retail property prices since 2009. Knight Frank projects that retail rents in non-core areas will rise by 5% this year. Management has a record of extracting good ROI from asset enhancement initiatives and continues to have opportunities to do so over at least the next three years. The recent acquisition of two properties in Feb could serve as a driver when the contributions are reflected in the 1Q12 results. With a P/B of 0.5x and FY12F dividend yield at ~7.4%, we think the stock is quite undervalued. We initiate with a BUY rating and HK$4.88 fair value.
New acquisition of two properties
Two shopping mall properties, Belvedere Garden and Provident Centre, were recently acquired in Feb for HK$1.9b. The yield-accretive acquisition was funded by debt. There is much potential for Fortune to improve their monthly passing rents of ~HK$16.5-19.5 psf (versus HK$32.2 psf for the original portfolio). Like the other suburban retail malls in Fortune’s portfolio, the two new properties have sizeable population catchment areas and are easily accessible by public transportation, including train stations.
Expanding retail market
Retail sales in Hong Kong jumped 25% YoY to HK$406b in 2011, reflecting an increase in consumption by locals and foreigners, including 28m tourists from the mainland. With HK and China’s real GDP projected to grow at 3% and 8.5% respectively in 2012 (Bloomberg), and with median household incomes growing, retail sales should continue to do well. Prices of retail spaces have grown significantly faster than average retail rents, and rents will probably continue to catch up. Knight Frank projects that retail rents in non-core areas will increase by 5% this year.
Upgrading existing properties
Management has a comprehensive asset enhancement programme in place and it intends to spend HK$50m-100m per year on asset enhancement initiatives (AEI). Its current portfolio has enough potential for AEI over at least the next three years. With target ROI of at least 15%, we view properly-executed AEI as a cost-effective way to pursue revenue and dividend growth.
Initiate with a BUY
We initiate with a BUY rating and a HK$4.88 fair value estimate based on a Dividend Discount Model (DDM) analysis. Fortune provides stable dividends with opportunity for growth through continued expansion of the retail market, the upgrading of existing properties and its recent acquisition of two new properties. Trading at a P/B of 0.5x, we see reasonable price upside.
Two shopping mall properties, Belvedere Garden and Provident Centre, were recently acquired in Feb for HK$1.9b. The yield-accretive acquisition was funded by debt. There is much potential for Fortune to improve their monthly passing rents of ~HK$16.5-19.5 psf (versus HK$32.2 psf for the original portfolio). Like the other suburban retail malls in Fortune’s portfolio, the two new properties have sizeable population catchment areas and are easily accessible by public transportation, including train stations.
Expanding retail market
Retail sales in Hong Kong jumped 25% YoY to HK$406b in 2011, reflecting an increase in consumption by locals and foreigners, including 28m tourists from the mainland. With HK and China’s real GDP projected to grow at 3% and 8.5% respectively in 2012 (Bloomberg), and with median household incomes growing, retail sales should continue to do well. Prices of retail spaces have grown significantly faster than average retail rents, and rents will probably continue to catch up. Knight Frank projects that retail rents in non-core areas will increase by 5% this year.
Upgrading existing properties
Management has a comprehensive asset enhancement programme in place and it intends to spend HK$50m-100m per year on asset enhancement initiatives (AEI). Its current portfolio has enough potential for AEI over at least the next three years. With target ROI of at least 15%, we view properly-executed AEI as a cost-effective way to pursue revenue and dividend growth.
Initiate with a BUY
We initiate with a BUY rating and a HK$4.88 fair value estimate based on a Dividend Discount Model (DDM) analysis. Fortune provides stable dividends with opportunity for growth through continued expansion of the retail market, the upgrading of existing properties and its recent acquisition of two new properties. Trading at a P/B of 0.5x, we see reasonable price upside.
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