Fortune REIT - UOB Kay Hian 2018-07-30: 1H18 In Line; Growth Continues To Be Stable

FORTUNE REAL ESTATE INV TRUST SGX:F25U

Fortune REIT - 1H18 In Line; Growth Continues To Be Stable

Fortune REIT’s 1H18 DPU of 26.34 HK cents (+3.2% y-o-y) is in line with our and market estimates. NPI rose 3.0% y-o-y on higher rental income. Disciplined cost control led to an improved NPI margin.
Fortune enjoyed positive rental reversions which helped offset the loss from the disposal of Provident Square in Feb 18. The major AEI at Fortune Kingswood will help sustain future growth.
Maintain HOLD with a new target price of S$9.50 as we raise our risk-free rate assumption. Entry price: HK$9.03.

Fortune REIT (Fortune) registered a 1H18 DPU of 26.34 HK cents, up 3.2% y-o-y. This is in line with our expectation, at 51.9% of our full-year estimate.
Despite the disposal of Provident Square in Feb 18, 1H18 gross revenue and NPI grew 2.2% and 3.0% y-o-y respectively. Provident Square accounted for 2.5% of Fortune’s 2017 NPI. Excluding the impact from the disposal, revenue and NPI grew 4.2% and 4.6% y-o-y respectively.
Management contained costs well, with 1H18 NPI margin improving 50bp to 76.5% from 76.0% in 1H17 on reduced utility expenses (due to energy savings).

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Rental reversions for the reporting period improved to 13.6% from 10.7%, on back of the pick-up in the economy and the retail sector. This helped to offset the negative impact from the disposal of Provident Square.
Average rents increased 6.3% from HK$43.2psf in 2H17 to HK$45.9psf in 1H18.

Asset enhancement initiative (AEI) works have commenced at Fortune’s largest retail mall by area, Fortune Kingswood at Tin Shui Wai. Management is targeting to complete the works by 2H19. We understand that the AEI will be carried out in two blocks (“west block” and “east block”) or six phases.
Fortune Kingswood accounted for 19.1% of Fortune’s 2017 NPI and it is estimated that the temporary loss in Fortune’s total NPI will be at around 3% at any given point in time during the process.
Management guided for a 10-15% ROI (calculated as increase in revenue per year divided by capex spent). We believe a higher ROI of 15-20% can be achieved as Fortune has a track record of achieving a > 20% ROI.

Portfolio occupancy declined from 98.1% as of end-Dec 17 to 96.0% as of end-Jun 18.
The most notable decline in occupancy was in Fortune Metropolis, where occupancy dropped from 98.4% in 2H17 to 83.1% in 2H18 as a result of non-renewal of an anchor tenant. The decline was also due to the disruption from the ongoing AEI at Fortune Kingswood (largest mall in portfolio by area) which saw occupancy fall by 1.8ppt in the same period. Portfolio occupancy is still healthy at 96.0%.

Gearing ratio fell from 27.4% in 2H17 to 22.3% in 1H18 after the sale of Provident Square in Feb 18 for HK$2.0b. Out of the total proceeds, HK$1.1b was also used to repay debt. Fortune is currently sitting on a debt headroom of HK$17.4b.
Management guided that they are still looking out for potential acquisitions in Hong Kong which may be difficult given the soaring property prices.

Management expects its performance to be stable on the back of an improved economy and the tight labour market. They also expect the opening of the HK-Zhuhai-Macau Bridge and the Express Rail Link to support a positive leasing market.
We share the same view and believe Fortune will continue to see stable low- to mid-single-digit DPU growth with its highly resilient portfolio (60-70% non-discretionary trade tenants).

We raise our 2019-20 DPU forecasts by 0.2-2.4%, to factor in the positive impact from the AEI at Fortune Kingswood.

Maintain HOLD with a lower target price of HK$9.50 (previously HK$9.72) to reflect a higher risk-free rate assumption of 2.75% (from 2.5%).
Our valuation is based on a DDM with a required rate of 6.8% and terminal growth rate of 1.2%.

Shaun Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-07-30

SGX Stock Analyst Report HOLD Maintain HOLD 9.50 Down 9.72