• 3Q14 DPU jumped 24.4% YoY
• Rental reversion robust at 24.6%
• Share price has performed well

3Q14 results within expectations

Fortune REIT reported a stellar set of 3Q14 results which met ours and Bloomberg consensus’ expectations. Total revenue surged 32.0% YoY to HK$416.6m as a result of strong rental reversions across its portfolio, better returns after the completion of its AEIs, and contribution from Fortune Kingswood which was acquired in Oct 2013. Income available for distribution and DPU rose 25.9% and 24.4% YoY to HK$193.1m and 10.3 HK cents, respectively. For 9M14, total revenue was up 33.0% to HK$1,230.1m and constituted 75.5% of our FY14 forecast. DPU of 31.18 HK cents represented a growth of 18.6% and formed 75.6% of our full-year estimates.

Operating metrics still healthy

Despite concerns over the “Occupy Central” movement in Hong Kong, management updated that it has not seen any impact on its malls as they are not located in the affected districts. Its tenants’ sales still registered a single-digit growth for 9M14 despite the sluggish 1.0% dip in total value of retail sales in Hong Kong for 8M14. This is because Fortune REIT focuses largely on the non-discretionary retail sector. Positive rental reversions of 24.6% were achieved for 9M14, while portfolio passing rent of HK$35.7 psf (as at 30 Sep 2014) compared favourably to the HK$34.2 psf recorded as at 30 Jun 2014.

Although portfolio occupancy fell from 99.1% (30 Jun 2014) to 97.1%, this was attributed to the commencement of AEI works at Belvedere Square. Fortune REIT expects occupancy at this mall to recover towards the 90% (from 76.6%) mark by the end of the year upon the completion of phase one. Phase two will start after Lunar New Year next year.

Downgrade to HOLD on valuation grounds

We lift our FY14 and FY15 DPU forecasts slightly by 1.3% and 1.8%, respectively. Our fair value estimate is bumped up from HK$6.68 to HK$7.29 as we also lower our discount rate assumption from 8.3% to 8.0% given Fortune REIT’s strong defensive attributes amid the current macroeconomic uncertainties. However, we are downgrading the stock to HOLD on valuation grounds, as Fortune REIT’s share price has already performed well, appreciating 16.2% YTD. We see limited upside at its current price level.

Source: OCBC Research - 12 Nov 2014