• Past: Results Recap
• Present: WPS GO
• Yet to Come: Wharf privatization?

Past: 1H18 Results Within Expectations

Wheelock & Co’s (20 HK) 1H18 group core profit decreased by HK$0.4b (6% YoY) to HK$5.2b, or ~41% of our initial full-year forecast. The decline was driven by a HK$0.5b decrease (73% YoY) in 20 HK’s own core profit before consolidation, which was due to

1. new accounting standards resulting in HK DP revenue being recognized later than it would have been previously and
2. a decrease in new project completion.

This accounting-driven decline was despite HK residential contracted sales increasing 131% YoY to record of HK$23.4b.

Separately, attributable core profit from Wharf REIC (1997 HK) increased by 8% YoY to HK$3.1b, while that of Wharf Holdings (4 HK) dropped 7% YoY to HK$1.6b. With this set of data points, we continue to remain positive on the operational prospects of 20 HK and its subsidiaries.

Present: General Offer for Wheelock Properties (SG)

Wheelock Properties (SG) (“WPS”) is trading above 20 HK’s offer price of S$2.10 per share as at 14 Aug’s close. Even if 20 HK chooses to revise the offer price from S$2.10 to S$2.20, this would only require an additional S$28m from the parent.

We believe that the privatization of WPS, if successful, would be a positive for 20 HK shareholders. At the current offer price, 20 HK stands to gain WPS’s assets at ~0.7x ex-cash P/B.

In conjunction with WPS’s S$1.1b of Orchard investment properties, we believe 20 HK may maximize WPS’s 22.5% stake in Hotel Properties Limited to help smoothen the path towards a West Orchard redevelopment. Refer to our 19 Jul WPS report for more details.

Yet to Come: Privatization of Wharf Holdings…?

With the WPS GO, there is increasing market expectation of the possibility of a privatization of 4 HK. The quantum to take 4 HK private is significantly larger. Assuming a 20% premium to 14 Aug’s close, 20 HK would need HK$31.1b to pay for the remaining 36.6% stake.

As at 14 Aug, 4 HK is currently trading at 0.48x fwd P/B while 20 HK is trading at an additional ~32% conglomerate discount of HK$50.2b. While we do not expect much operational synergies from a 4 HK privatization, we believe its success could help to significantly narrow the conglomerate discount.

After adjustments, our fair value remains at HK$67.70. Since our initiation on 28 Dec 2017, the stock has delivered a total return of -1.8%, outperforming the Hang Seng Index by 2.1 ppt. Maintain BUY.

Source: OCBC Research - 15 Aug 2018