Brokers' take: Morningstar raises Hongkong Land fair value on share buyback news

MORNINGSTAR Equity Research has raised its fair-value estimate for Hongkong Land Holdings H78 to US$7.40 from US$7.20 previously.

This comes as the property group's proposed US$500 million share buyback programme is seen as an accretive transaction as well as a positive from a capital-allocation perspective given the "meaningful discount" to the research house's fair value, said analyst Michael Wu in a report dated Tuesday.

The stock has a five-star Morningstar rating, and its economic moat is deemed "narrow".

To recap, Hongkong Land on Monday said it intends to invest up to US$500 million to buy back its shares in a programme extending until Dec 31, 2022, as part of its bid to reduce the company's capital.

Shares of the group surged as much as 13.6 per cent or US$0.57 the following day to peak at US$4.77 on the Singapore Exchange, where it has a secondary listing. Hongkong Land is primarily listed on the London Stock Exchange.

Noting that the stock remains undervalued on a dividend yield of 4.5 per cent, Mr Wu said in his report that he does not expect the share buyback to impact Hongkong Land's financial position, considering its gearing of 12 per cent as at end-H1 2021.

He has assumed the majority of Hongkong Land's intended share repurchase to occur in 2022 in view of the stock's liquidity, and with four months remaining in its fiscal year for 2021.

The group's current strong capital position is supportive of its future growth prospects, he added.

"The key catalyst would be a recovery of the office market in Hong Kong, from a sustained recovery in the office market, in our view. Investment properties contribute around 80 per cent of operating profit, with Hong Kong offices the largest contributor by revenue," said the analyst.

Morningstar is forecasting FY2021 and FY2022 revenue of US$2.49 billion and US$2.99 billion for the group, which translates to 18.9 per cent and 20.2 per cent year-on-year revenue growth, respectively.

The research house's assumptions have factored in spot rent of HK$100 per month, with HK$118 per square foot per month of average rents estimated for FY2021.

"The reopening of Hong Kong's border with mainland China, and internationally, is expected to see office demand return while also benefiting the retail component in Central. Our rental assumption for retail factors in a 10 per cent decline in spot rental for FY2021 and steady in 2022," commented Mr Wu.

As at 1.47pm on Thursday, shares of Hongkong Land were trading US$0.02 or 0.4 per cent higher at US$4.86 on the Singapore bourse.