Wheelock upgraded to Add, target hiked by CGS-CIMB

Hong Kong currency notesHong Kong currency notes

CGS-CIMB upgraded Wheelock & Co. to Add from Hold, despite its core profit plunging, citing its attractive valuation.

“We believe the upcoming launches of the Malibu project’s subsequent phases, and
potential price hikes for its inventory units, will be the key catalysts for its share price,” CIMB said.

It raised its target price to HK$72.00 from HK$69.00 after raising its net asset value estimate on the latest land bank and completion schedule.

While Wheelock’s 2017 core profit rose 2 percent to HK$12 billion, beating CIMB’s expectations on stronger China property sales under Wharf Holdings, its company level core profit plunged 64 percent to HK$1billion on low margin from Hong Kong property sales, CIMB said in a note on Tuesday.

But CIMB noted that Wheelock will release inventory units from several developments this year; it also pointed to strong reception of the first phase of the Malibu project, with all 750 units taken up within two days of launch, yielding HK$8 billion.

CIMB forecast contracted sales compound annual growth rate (CAGR) of 16 percent over 2018-2020.

Margins tipped to climb

The brokerage also said that a weak earnings before interest and tax (EBIT) margin, estimated around 6 percent, on Hong Kong property sales in 2017 reflected poor market timing and high construction costs over 2015-16. But with home prices rising around 30 percent since 2016, CIMB said it expected the EBIT margin to rise to a healthy 20-30 percent in 2018-20.

Subsidiaries Wharf Real Estate Investment Co. (REIC), rated Hold with a HK$49 target, and Wharf Holdings, rated Reduce with a HK$26 target, are likely to maintain solid fundamentals, despite share prices that were either fair or overhung, the brokerage said, noting Wheelock owns 62 percent of each of the Hong Kong-listed companies, which together accounted for 86 percent of 2017 core profit.

“We expect Wharf REIC’s fundamentals to remain strong but its current share price has already factored in a recovery in the retail market,” it said. “As for Wharf Holdings, while we believe its fundamentals are strong as well, its hazy investment strategy, e.g. equity investment in technology stocks, will likely be penalised by the market.”

Shares of Wheelock ended Tuesday up 1.59 percent at HK$60.80. Wharf REIC ended up 1.0 percent at HK$55.35 and Wharf Holdings ended down 0.17 percent at HK$28.85.

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