AMTD Research has published the report of FEC (35.HK). We reiterate Buy rating with a target price of HK$4.21/sh. With US Fed and Reserve Bank of Australia cutting rates in the last few days, we believe global property investors will scour the globe to chase for yield in the medium term. This should stimulate the UK and Australia property sales of Far East Consortium (FEC), following its recent launches of Consort Place in London and Queen’s Wharf Brisbane.
Asset inflation trend will attract global property investors
Property is often considered as a relatively safe asset class and is almost a must have for Global High Net Worth Individuals in their portfolio. As central banks around the world cut their countries’ respective benchmark rates (US Fed by 50bps and RBA by 25bps) we expect the lower borrowing costs will drive rental yields lower, resulting in property asset inflation in the medium term. We believe that FEC is well poised to capture this trend with their recently launched property projects in London Canary Wharf and Brisbane in Australia, respectively. We estimate that UK and Australia contribute to ~80% of FEC FY20E property development revenues. Depending on the project, global property investors can contribute up to ~50% of such property sales.
Consort Place London: A gem at the heart of Canary Wharf
FEC recently launched Consort Place for sale in Feb 2020, a project that is at the heart of Canary Wharf, neighbouring the London headquarters of JP Morgan, HSBC, Morgan Stanley, etc. Consort Place is a 390,000 sqft mixed-used residential development project and we believe it is on track to be a key FY2020-2021 sales contributor with a GDV of ~HK$4bn, with an ASP of ~GBP1,000-1,100/sqft.
Queen’s Wharf Bisbane: A scarce Resi/Com/Hotel/Casino Development
The developer has also launched its Queen’s Wharf Brisbane project for sale in Feb 2020, which was well received by the market despite the COVID-19 outbreak. The project is also mixed-used development comprising of residential, hotel and a casino, overlooking the Brisbane river. Phase 1 was recently launched with 252,000 sqft and is expecting to achieve a total GDV of ~HK$3.3bn.
Hotel portfolio face challenges, but manageable as cap rate compresses
COVID-19 outbreak is putting pressure on the company’s hotel portfolio, with occupancy rates under pressure. However, we believe the cashflow and earnings impact is manageable, as property development is the main earnings driver contributing to 56% of FY20E Total Revenues, vs ~27% from Hotels. From an asset value perspective, while Hotels contribute to ~52% of our SOTP GAV, the rate cuts will also help to mitigate the rental pressures as cap rate is expected to compress.
Stock offering 6.3% div yield, at 5.5x FY20E P/E, 0.6x FY20E P/B
We believe Far East Consortium is trading at attractive valuations of 5.5x FY20E P/E and a 0.6x FY20E P/B. The values are mostly at cost, as hotels are not marked to market under the accounting rules. This makes the valuation all the more attractive, considering that it is trading at a same P/B with other HK property developers who have a large investment property portfolio which is marked-to-market on their books.
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