Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...
Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...
Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...
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Regional <strong>Small</strong>/<strong>Mid</strong> <strong>Cap</strong> <strong>Strategy</strong> Q2 2008<br />
Fortune REIT<br />
Bloomberg: FRT SP | Reuters: FORT.SI<br />
BUY HK$5.08 STI: 3,000<br />
Price Target : 12-Month HK$ 6.83<br />
Potential Catalyst: better retail market; asset enhancment initiatives<br />
Analyst<br />
Jeff Yau CFA· (852) 2820 4912 ·<br />
Jeff_yau@hk.dbsvickers.com<br />
Price Relative<br />
7.50<br />
7.00<br />
6.50<br />
6.00<br />
5.50<br />
5.00<br />
HK$<br />
4.50<br />
2004 2005 2006 2007<br />
Relative<br />
Index<br />
Fortune REIT (LHS) Relative HSI INDEX (RHS)<br />
Forecasts <strong>and</strong> Valuation<br />
FY Dec (HK$m) 2006A 2007A 2008F 2009F<br />
Turnover 614 615 655 703<br />
Net property income 438 450 483 505<br />
Pretax Profit 998 764 333 355<br />
Net Profit 939 704 268 286<br />
Distribution income 277 285 294 295<br />
DPU (HK$) 0.34 0.35 0.36 0.36<br />
DPU Gth (%) 1.7 2.5 2.7 0.2<br />
Div Yield (%) 6.7 6.9 7.1 7.1<br />
Gross Gearing (%) 25 23 23 22<br />
Book Value (HK$) 8.53 9.04 9.43 9.87<br />
P/Book Value (x) 0.6 0.6 0.5 0.5<br />
238<br />
188<br />
138<br />
88<br />
38<br />
Improving fortune<br />
Story: With 11 suburban malls, Fortune REIT should be<br />
able to capitalise on retail sales growth. It has continued<br />
to unlock <strong>the</strong> hidden value of its assets through asset<br />
enhancement <strong>and</strong> re-positioning initiatives.<br />
Point: Total retail sales grew 12.8% in value in 2007,<br />
amid increasing local consumption <strong>and</strong> tourist spending.<br />
Therefore, rents of decentralised retail centres increased<br />
7.5%, according to Jones Lang LaSalle. Despite <strong>the</strong> USled<br />
global economic slowdown, we believe retail sales<br />
should hold up well in 2008. This is particularly true for<br />
food <strong>and</strong> beverage, <strong>and</strong> supermarket categories (Fortune<br />
REIT has wider exposure), which are usually more<br />
resilient. This should bode well for <strong>the</strong> income outlook of<br />
Fortune REIT.<br />
Fortune REIT has completed a very successful asset<br />
enhancement move at Waldorf Garden property in 2007,<br />
which involves subdivision of 33,000 sf restaurant space<br />
into smaller units. In view of strong take-up rates with<br />
substantially higher rents achieved for <strong>the</strong> enhanced<br />
zone, Fortune REIT has proceeded with reconfiguration<br />
of <strong>the</strong> adjacent 10,000sf space to fur<strong>the</strong>r improve rental<br />
<strong>and</strong> streng<strong>the</strong>n retail offerings. It will also undertake<br />
asset enhancement diagnostic study to explore <strong>the</strong><br />
potential of optimising rental return by fully utilising <strong>the</strong><br />
open atrium at City One Shatin Property, to improve <strong>the</strong><br />
accessibility of The Metropolis Mall <strong>and</strong> to add new retail<br />
area to capitalise on strong shopper traffic at Ma On<br />
Shan Plaza.<br />
Relevance: With high distribution yields of 7.1% for<br />
FY08 <strong>and</strong> FY09, Fortune REIT should be a safe haven in<br />
<strong>the</strong> prevailing shaky market. Our DDM-based target price<br />
of HK$6.83 suggests total return of 42%. Maintain BUY.<br />
Earnings Rev (%) - -<br />
Consensus EPS (HK$) 0.36 0.37<br />
Sector: REIT<br />
Principal Business: Leasing of retail rental properties<br />
At A Glance<br />
Issued <strong>Cap</strong>ital (m shrs) 812<br />
Mkt <strong>Cap</strong> (HK$m/US$m) 4,126 / 530<br />
Major Shareholders (%)<br />
Cheung Kong (Holdings) 32.36<br />
PGGM 14.77<br />
Hutchison Whampoa 6.93<br />
Temasek Holdings (Private) Ltd. 6.86<br />
<strong>DBS</strong> Bank 6.48<br />
Free Float (%) 32.61<br />
Avg Daily Volume (m shrs) 0.6<br />
Page 28<br />
www.dbsvickers.com<br />
Refer to important disclosures at <strong>the</strong> end of this report
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