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Link REIT: 3.5% Yield Cheap Or Expensive?
Corporate Digest, Featured | 17 December 2014
By: Peter Ng
Articles (81) Profile

Shares Investment’s Research team has come up with 4 stock picks that we think are winners for 2015. Our selection criteria for this is simple. It must be good enough for us to think of putting our own money into it. So there you go. Let’s look at stock pick #3.

Like any real estate investment trusts (REITS) that are listed in Singapore, where these trusts acquire properties and rent them out to tenants in exchange for rental revenue, Link REIT owns a portfolio of properties which include shopping malls, fresh markets, food stalls and car parks in Hong Kong.

Being the largest REIT listed not only on the Hong Kong Stock Exchange but also in Asia, the trust is commanding a market capitalisation of US$13.8 billion as at 15 September, making it more than twice the value of Capitamall Trust (US$5.5 billion), the largest REIT in Singapore.

Link REIT constructs its portfolio with an objective to mainly include properties that are located in the suburban areas of Hong Kong (60 percent: New Territories), where the population of these areas comprises mainly of the community staying there.

Compared to urban malls, spending in these areas is largely non-discretionary and represents the necessities such as groceries and consumer staples etc.

As a result, the non-discretionary spending from the community creates a consistent revenue stream for the tenants, which in turn translates into a stable rental income stream for the trust.

Financials

The trust’s stability can be observed from its performance on a five-year period between FY09 and FY14, as it booked an 11.8 percent compounded annual growth rate on its net property income. Within the same period, distribution per unit also came in higher every year where the amount grew in excess of 70 percent to HK$1.6574 from HK$0.9737.

Source: Company

As at 30 September, Link REIT has HK$125.5 billion worth of investment properties under its portfolio that are financed by HK$14.3 billion of bank loans, where 79.6 percent of these debts are locked into fixed rates. With some minor adjustments, the trust’s gearing ratio stands conservatively at 11.4 percent.

Although an eventual interest rate increase would have an impact on property valuations, however, the trust’s performance and distributions are expected to be relatively unaffected given the large pool of debt that is secured in fixed rate.

On the other hand, given the 45 percent gearing limit imposed on the leverage of Hong Kong REITs, Link REIT possesses a significant amount of headroom to pursue acquisitions should there be a major contraction in property prices.

Valuations

Using an asset based valuation approach, Link REIT reported HK$129.9 billion of assets and HK$19.3 billion of total liabilities on its balance sheet as at 30 September. With 2.3 billion units issued, the trust’s net asset value (NAV) per unit is HK$48.23. When matched with the closing price of HK$48.60 on 9 December, Link REIT trades fairly against its NAV. In addition, it should be noted that the trust’s highest premium traded over NAV between FY10 and FY14 is 21.6 percent.

Next, Link REIT’s five-year annual distribution yield between FY09 and FY14, calculated by taking annual distributions divided by the last day’s closing price of the trust for the relevant financial year, ranged between 3.5 percent to 5.1 percent. Currently, the trust is yielding 3.5 percent based on the closing price on 9 December, which is on the lowest side of the spectrum based on its historical yield.

Soundness For A Price

Link REIT gets a tick as a company which is fundamentally sound in light of a strong business model coupled with a lightly leveraged balance sheet. However, the trust’s soundness has not gone unnoticed as share price has advanced 38.5 percent to a closing price of HK$48.60 (9 December) from a 52-week low of HK$34.55 (4 February).

At the current valuation, although an investor pays a fair value for the trust’s underlying assets however, on a historical basis, its current yield of 3.5 percent is the lowest among the past five years. On both frontiers, there is no margin of safety for an investor.

On a side note, the impending interest rate increase could be an opportunity to rationalise Link REIT’s valuations.

You can check out the other stock picks we have chosen for 2015; RexLot Holdings, Karex.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.


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