Link REIT upgraded to Buy by Nomura on buyback hopes and trade-war safe haven status

Hong Kong street sceneHong Kong street scene

Nomura upgraded Link REIT to Buy from Neutral on expectations the REIT could restart unit buybacks “anytime” and as it offers a relative safe haven amid the U.S.-China trade dispute.

Link REIT last bought back units in late March, Nomura noted, but it expected the REIT could restart at any time as it has already gone ex-dividend, as of June 20. The REIT also needs to buy back additional shares to “neutralize” the distribution per unit (DPU) loss from its recent asset disposals of 17 properties, the bank said in a note on Friday.

While buybacks since the disposals’ completion at the end of February have been “selective and sporadic,” that may be due to DPU for fiscal 2018 only being marginally affected, Nomura said; “we believe that the buyback scheme would speed up as DPU loss would be felt more fully in fiscal 2019.”

Additionally, the unit is trading at a 16 percent discount to its net asset value (NAV) of HK$83 per unit, compared with the REIT’s track record of buying back units at levels ranging from a 20 percent discount to a 10 percent premium, Nomura said.

Link REIT also offers a relative safe haven amid the U.S.-China trade dispute, it said.

“In the past, Link REIT’s relative performance to HSI has been strongly correlated to U.S. long-bond yields. Nevertheless, Link REIT’s performance has been resilient in the second quarter of 2018, which we attribute to it being almost immune to the U.S-China trade dispute,” it said.

Much of Link REIT’s property portfolio is made up of Hong Kong retail properties focused on domestic demand, with locations near public transport hubs and housing estates.

Nomura raised its target price for the REIT to HK$79.10 from HK$75.80 as it rolled its forecast forward to fiscal 2019. It raised its fiscal 2019 DPU forecast to HK$2.89 from HK$2.60, implying 16 percent on-year DPU growth. It also raised fiscal 2019-20 DPU forecasts by 11-13 percent on expectations buybacks will reduce the number of units on issue.

The unit ended Friday up 0.79 percent at HK$70.00.

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