Hongkong Land Holdings Limited (SGX:H78) is a property investment, management and development group. It has a main listing in London with secondary listings in Singapore and Bermuda. The group divides its business into two broad categories, namely, investment properties and development properties. The former refers to properties that it owns for rental income, while the latter refers to development projects that the company undertakes. On Thursday (26 July), it released its earnings update for the first half of 2017.
Underlying profit slightly down but nothing to be fazed about
Underlying profit attributable to shareholders, the key metric for Hongkong Land’s business, fell 3% year-on-year to US$455 million in the first half of 2018. Including a US$661 million in revaluations gains in the period, total profit attributable to shareholders was US$1,124 million.
The lower underlying profit was due to lower profit from development properties but partially offset by higher recurring rental income from its investment properties. However, it is worth noting that profit from its development properties are usually lumpy.
Underlying earnings per share was 19.39 US cents. Total earnings per share was 47.9 US cents for the period.
Good results in investment property segment
Its Hong Kong portfolio of 12 commercial properties performed well due to a tighter supply this year. The group’s central office vacancy was a healthy 1.9% at the end of the reporting period, though it was up slightly from 1.5% at end-June 2017.
Average rental rose to HK$111 per square foot, compared to HK$106 per square foot in the corresponding period last year, and HK$109 per square foot as of 31 December 2017.
The average retail rent also rose to HK$231 per square foot, compared to HK$225 per square foot on 31 December 2017. The group recorded valuation gains on its Hong Kong properties of 2%.
In Singapore, mild rental reversions continued but vacancy remained low. It is worth noting that the bulk of the rental income from its investment properties come from its Hong Kong portfolio.
Development business updates
There were fewer sales completion in the period due to lesser sales launches. Attributable sales in mainland China was US$650 million for the period, compared to US$701 million and US$411 million in the first and second halves of 2017 respectively.
But management did say that the second half of the year will be better as more projects are expected to be completed. The company has US$1,507 million in sold but unrecognised contracted sales. This compares to US$1,032 million at the end of 2017.
During the reporting period, the group acquired Tulip Garden, a residential site for redevelopment. It also launched sales for its Margaret Ville project in May. Regionally, the group has entered into agreements to develop three new properties in Bangkok, Jakarta and Manila.
The group’s financial position remains extremely robust for a property developer. As of 30 June 2018, it had net debt of US$3.1 billion, giving it a net gearing of 8%. Although this is slightly above a net debt position of US$2.5 billion and 7% net gearing at the end of 2017, this is largely expected due to greater cashflow requirements for its upcoming projects. An 8% net debt position is also very manageable.
The revaluation gains for the period has increased the net asset value per share to US$15.93, a 1.7% increase from US$15.66 recorded at the end of 2017.
The Foolish bottom line
All things considered, the group’s performance did not disappoint. Despite lower underlying profit, its recurring rental income improved. Returns from its development segment is predictably lumpy and investors should not be overly concerned with the lower profit from that segment.
At the time of writing, shares of Hongkong Land traded at US$7.17 per share. This translates to a low price-to-book ratio of just 0.5 and an annualised underlying price-to-earnings of 18.4. The group also announced an interim dividend of 6 US cents per share.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Hongkong Land Holdings. Motley Fool Singapore contributor Jeremy does not own shares in any companies mentioned.