Wharf Holdings: core portfolio provides growth impetus

The Grade A office market boom and a steady recovery of the retail sector means good news for Wharf Holdings.

StockHouse LogoAs one of the largest commercial landlords in the SAR, Wharf Holdings [4] is ready to reap the benefits of the current Grade A office market boom as well as from a steady recovery of the retail sector. Having an office/retail investment portfolio of over 11 million square feet (sqft), which is currently 90% occupied, the company is poised to gain from positive rental reversions in both sectors this year and next.

Property agency Colliers Jardine believes interest rate cuts and the WTO factor will lead to greater investment and fuel further growth in the local economy. In view of this, Grade A office rents will continue to strengthen in 2001 and are estimated to register a 15% increase over the next 12 months (after having already risen 40-50% on average in 2000).

WharfNew and renewed office leases at Gateway II and Harbour City are being negotiated at monthly rental rates of HKD$26-HKD$27 ($3.33-$3.46) per square foot (sqft), in line with current asking rates in the Tsim Sha Tsui area. It is expected that with the launch of the third office tower at Gateway II early this year, Wharf will be able to take advantage of the present market strength and fill up the space quickly at current market or even higher rates. Positive rental reversions for existing office space and additional rentals from the new Gateway II tower are likely to bode well for the company’s financial year 2000 and 2001 results. 

It is estimated that when optimal occupancy is achieved at its core investment property portfolio, total rental income could amount to HKD$4.25 billion per annum. 

Government statistics show that for the first 10 months of 2000, total retail sales increased 4% year on year in value terms and 9% year on year in volume terms. Also, the deflation rate continued to narrow as the CPI registered -2% in November 2000, compared with -2.7% in October 2000. Going into 2001, the half point interest rate cut will positively impact consumer spending in general and thus augurs well for Wharf’s 4.2 million sqft retail property portfolio, which already enjoys an average occupancy rate of 96%. Current monthly asking rents for the company’s retail space range from HKD$40 per sqft to HKD$45 per sqft.

It is estimated that when optimal occupancy is achieved at its core investment property portfolio, total rental income could amount to HKD$4.25 billion per annum. It would appear that for the short term at least, steady recurring income from property investments will provide a snug cushion for the company’s bottom line at a time when its other business sectors are either experiencing teething pains (i-CABLE [1097]) or going through a re-investment phase (CT9 Terminal).

Apart from its retail and office rental properties, Wharf’s three Hong Kong hotels are also expected to continue their strong first half performance during the second half of the 2000 financial year, reflecting positive trends in the local tourism industry. Tourist arrivals for the full year 2000 are estimated at 12.5 million, up 10.6% year on year.

The company has reached the final negotiation stages for the management contract of a hotel located in the central financial district of Western Beijing, to be named “The Marco Polo, Beijing”.

Wharf posted interim net profit growth of 5.3% year on year to HKD$1.12 billion for the six months to 30 June 2000. Total turnover for the period was up 16% year on year to HKD$5.8 billion.

In July 2000, Moody’s Investors’ Services raised the outlook for the company’s long-term foreign currency loan rating from “negative” to “stable”.  Going forward, the recent 50 basis point (bp) interest rate cut locally and in the US is believed to have a palliative effect on the company’s debt servicing burden.

At Friday’s close of HKD$21.05, the stock is trading at a 30% discount to Jardine Fleming’s estimated NAV (end 2001) of HKD$30.29, and at 21 times financial year 2000 consensus EPS of HKD$1.01. It seems that the improved outlook of the company’s core business and much of the positive impact of the 50bp rate cut are already in the price, although further upside is still possible given the likelihood of further credit easing in the pipeline.

Alice Poon’s Property/Infrastructure Watch List


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