20181015-高盛-领展房产基金-00823.HK-Pre-blackout_meeting_takeaways__Operations_steady__M_A_a_potential_swing_factor_7页_525kb

Link REIT (0823.HK) Summary: Pre-blackout Meeting Takeaways

Core Content Overview

Link REIT (0823.HK) held a pre-blackout analyst meeting on October 11, 2018, ahead of the 1H FY19 results announcement on November 14. The key takeaways from the meeting highlight the company's stable operations, ongoing asset recycling initiatives, and the potential strategic impact of M&A activities.

Key Takeaways

Operations

• Tenant Sales Growth: Retail tenant sales growth was 8.0% in April to June 2018, consistent with FY18 performance.
• Occupancy-Cost-Ratio (OCR): OCR remained at 13.5% during the same period, slightly higher than FY18's 12.9%.
• Stability: Management believes retail operations will remain steady due to non-discretionary exposure.
• Comps: The 1H FY19 reporting period may see stronger performance compared to 1H FY18, which had a 7% yoy sales growth.
• Asset Disposal: The company completed the disposal of 17 assets in early CY2018, but has only repurchased 40 million units, falling short of the 80 million target, which may affect earnings.

The Quayside Development

• Project Overview: A new 0.9 million sq ft office development, with 60% attributable to Link REIT.
• Completion Date: Scheduled for early 2019.
• Development Cost: Estimated at HK$9.9 billion.
• Rentals: Expected to be mid-HK$30s per sq ft.
• Initial Yield: Roughly estimated at mid-3% on cost.
• Pre-letting: As of August 2018, 56% of the office space was pre-let, including anchor tenant JP Morgan.

Asset Recycling and M&A

• Portfolio Review: Management announced a portfolio review in September 2018, which may involve potential asset disposals and acquisitions.
• Potential Disposal: Local media reported that Link REIT is considering selling 10 retail assets, including Shan King Commercial Centre, for over HK$10 billion to Blackstone Group.
• Potential Acquisition: Link REIT may also be considering purchasing the Central Walk mall in Shenzhen for HK$7.4 billion.
• M&A Strategy: The company has a history of active capital recycling through M&A, which is expected to enhance portfolio quality and provide growth opportunities.

Our View

• Short-Term Outlook: Operations are expected to remain steady, with no immediate announcements on further buybacks due to the ongoing portfolio review and blackout period.
• EPS Adjustment: Our EPS has been fine-tuned by up to -1% based on updated cost assumptions.
• Target Price: Our 12-month DCF-based target price remains HK$75.00, unchanged from previous estimates.
• Rating: We maintain a Neutral rating, based on relative valuation within the Hong Kong Property sector.
• Upside Potential: The target price implies an upside of 4.2% from the current price of HK$71.95.
• Key Risks
  • Upside Risks: Further NAV-accretive disposals or DPU-accretive M&A.
  • Downside Risks: Faster-than-expected interest rate increases, which could raise financing costs and reduce property valuations.

Financial Metrics

Metric	Current	12m Target	Upside (%)
Price	HK$71.95	HK$75.00	4.2%
P/B Ratio	0.9X	-	-
Dividend Yield	3.7%	-	-
FCF Yield	3.4%	-	-
EPS (New)	HK$2.68	-	-
EPS (Old)	HK$2.72	-	-

M&A Rank

• Rank: 3 (Low probability of being an acquisition target).
• Implication: Companies with M&A rank 1 or 2 are considered more likely to be acquired, and Goldman Sachs incorporates an M&A component into their target price calculations. Rank 3 does not affect the target price.

GS Factor Profile

• Growth: Based on forward-looking sales, EBITDA, and EPS growth.
• Financial Returns: Based on ROE, ROCE, and CROCI.
• Multiple: Based on P/E, P/B, P/D, EV/EBITDA, EV/FCF, and EV/DACF.
• Integrated: Composite of Growth, Financial Returns, and Multiple, with a Neutral rating indicating a balanced outlook relative to historical fundamentals and valuation.

Investment Context

• Market Cap: HK$148.9 billion.
• Enterprise Value: HK$170.1 billion.
• 3m ADTV: HK$376.7 million.
• Sector Rank: 3rd in Hong Kong Property M&A.

Additional Information

• Exhibit 1: FY18 Book Value (BV) was approximately HK$203 billion.
• Exhibit 2: 12-month forward dividend yield calculation.
• Exhibit 3: Link REIT trades at 0.9X P/B, indicating a potential undervaluation.

Regulatory and Disclosure Notes

• Analyst: Justin Kwok, CFA.
• Client Relationship: Goldman Sachs has an investment banking relationship with Link REIT.
• Conflict of Interest: Goldman Sachs policy prohibits analysts from owning securities in their coverage areas.
• Analyst Compensation: Based on the profitability of Goldman Sachs, including investment banking revenues.
• Global Distribution: Research is distributed by Goldman Sachs offices globally, including Hong Kong, Singapore, and others.

Summary of Key Points

• Link REIT's operations remain stable with steady tenant sales growth.
• The company is actively reviewing its asset portfolio, with potential for both disposals and acquisitions.
• The Quayside development is a key project with strong pre-letting and expected yield.
• The company's M&A activity is seen as a strategic growth driver.
• The Neutral rating reflects a balanced valuation outlook.
• Key risks include interest rate fluctuations and potential NAV/DPU accretion from M&A.