On Sept 6, Hongkong Land announced a US$500 million ($673 million) share buyback programme from now till December 2022. In an announcement, the company said the buyback is in line with the group’s long-standing capital allocation practice which is to prioritise investment in new assets to drive long-term growth and shareholder value; continued payment of steady and, over time, increasing dividends; and investment in existing assets on an opportunistic basis, including through share buybacks.
“The purpose of the share buyback is to reduce the capital of the company. As the holding of treasury shares is not provided for in the company’s constitution, any shares which are repurchased by the company will be cancelled,” Hongkong Land says in a statement.
The following day after the announcement, Hongkong Land promptly started the buying. It picked up 320,000 shares at an average of US$4.67. Looking ahead, which stock could be next to practise Hongkong Land’s share buyback programme?
Jardine Matheson Holdings holds 79.44% of Mandarin Oriental International and 50% of Hongkong Land. Could sibling Mandarin Oriental be next given that it also owns properties — mainly hotels — in plum locations? Mandarin Oriental trades at a discount to its net asset value (NAV) of US$3.95 as at June 30, but the discount is a lot narrower at 0.52 times, compared to Hongkong Land’s P/NAV of 0.32 times. However, Mandarin Oriental has a strong brand name and that in itself is an intangible asset.
During a results briefing on July 29, CFO Matthew Bishop said, ”Many of the group’s property assets are in prime locations located in cities where there is a scarcity of comparable assets and showing resilience.”
Mandarin Oriental owns 100% of eight properties in key gateway cities such as London, Paris, Tokyo and Hong Kong; 85.3% of Mandarin Oriental Geneva; 96.9% of the Mandarin Oriental Jakarta; and 25% of Mandarin Oriental New York and Mandarin Oriental Miami. In addition, it holds 50% each of the Mandarin Oriental Singapore and the Mandarin Oriental Ritz Madrid and 47.6% in the Mandarin Oriental Bangkok, located along the Chao Phraya River.
Mandarin Oriental has moved away from an asset-laden model and is adopting an asset-light strategy for future management contracts. Bishop points out that Mandarin Oriental’s new pipeline projects consist mainly of management contracts for 20 hotels and 13 branded residences.
On the asset front, the hotel group is redeveloping The Excelsior Hotel site in Causeway Bay into a mixed-used development. “In 2019, the group announced its intent to redevelop the site into a mixed-use commercial building for a cost of some US$650 million, to be financed using a combination of existing and new debt facilities. Completion of the building remains on schedule for 2025. As previously indicated, it is not the group’s intention to be the long-term owner of commercial property. Opportunities for the monetisation of this asset will continue to be reviewed,” Mandarin Oriental said in a statement on July 29.
As at June 30, Mandarin Oriental’s “tangible” assets were valued at US$1.15 billion while investment properties under development were valued at US$2.44 billion. Nevertheless, Mandarin Oriental is unlikely to launch a Hongkong Land-type of share buyback programme because that could cause liquidity to shrink. Perhaps, it could have a share buyback programme leading to privatisation instead.
Rationale for buyback programme
Since the announcement, Hongkong Land’s share price has rallied by as much as 16% in the days after the announcement but this still represents a hefty discount to Hongkong Land’s June 30 NAV of US$14.75.
In 1HFY2021 ended June 30, Hongkong Land reported a net loss of US$865 million compared to a net loss of US$1.83 billion in FY2020. However, underlying profit to shareholders rose 12% to US$394 million. Annualised, this translates into an ROE of just 2.3%.
But even with the share capital reduction, the US$500 million is unlikely to make much of a dent in Hongkong Land’s US$34.4 billion of shareholders’ funds.
According to DBS Group Research, the buyback would raise the net asset value to US$15.31 per share. As at June 30, the company’s NAV was US$14.75.
“In our opinion, this large-scale share repurchase programme signals the stock’s strong embedded value and should lend support to its share price which was under pressure of late,” says Joseph Yau, an analyst at DBS Group Research. While Hongkong Land’s stock continues to trade at a hefty discount to NAV, the discount has reverted to the mean. Other ways to narrow discount Hongkong Land’s share buyback programme is a trifle short of the US$513 million in dividend payouts that the company had declared in FY2020 and FY2019. Could Hongkong Land have doubled its dividends instead? And are there other ways to narrow the discount between share price and NAV? In Hong Kong, the group’s portfolio at the heart of the financial district in Central consists of 12 interconnected commercial buildings, providing over 450,000 sq m of Grade A office and luxury retail space. As at Dec 31, 2020, the Central portfolio, which includes retail and a hotel, was valued at US$28.01 billion.
In Singapore, Hongkong Land owns a onethird stake each in Marina Bay Financial Centre and One Raffles Quay. Based on Keppel REIT’s valuation of its 33.3% share, the Singapore portfolio is valued at $4.17 billion.
Could Hongkong Land have securitised these choice assets in a REIT and paid a special dividend to its shareholders? Investors certainly think so but Robert Wong, chief executive of Hongkong Land, says there is still a case for it being embedded in the Central portfolio.
“In Central, the bulk of our tenant base is financial, legal and accounting firms and these comprise 80% of our portfolio. Our business depends on whether Hong Kong continues to grow or maintain its status as a key financial market in the region. Our capital market is very active, IPOs keep coming through, and legal is doing well because legal is a key part of capital markets. If the financial market continues to perform healthily then the demand equation should be positive,” he says during the company’s 1HFY2021 results briefing.
However, the main uncertainty is still the pandemic. A big driver of luxury spending in Central is from Chinese tourists but the border is closed. Although Wong expects rental reversions of Central’s office and retail space to be negative, he is confident Hongkong Land’s active leasing management is likely to keep occupancy above average in Central.
Some market watchers see the share buyback programme as Hongkong Land’s somewhat traditional management making an effort to reduce the discount between price and NAV.
CGS-CIMB says, “We think the [buyback] programme reflects management’s positive response to investors’ concerns on Hongkong Land’s persistently deep discount to book value and NAV. It trades at a 59% discount to [our] end FY2021 forecast NAV, with a 5.2% dividend yield, and is one of the cheapest Hong Kong landlords.” CGS-CIMB has an “add” recommendation and a target of US$5.70 for the stock.
Other possible candidates
Among the stocks trading at a large discount to NAV, Guocoland has a substantial amount of investment properties. As at June 30, Guocoland had $4.97 billion in investment properties including $1.82 billion under development. In addition, Guocoland has a further $3.55 billion in development properties that are held for sale.
Among the investment properties are Guoco Tower comprising office and retail, valued at $2.54 billion, 20 Collyer Quay valued at $509.5 million, and Guoco Midtown at $1.76 billion. Guocoland is trading at 0.46 times its June 30 NAV of $3.60. It could easily narrow this discount by securitising Guoco Tower and 20 Collyer Quay but is probably unlikely to do so.
Elsewhere, City Developments has already taken steps to unlock value at Fuji Xerox Towers, which could add as much as $1 billion to its revalued NAV.
During a results briefing on Aug 12, group CEO of UOL Group, Liam Wee Sin said it is premature to look at fund management but he is studying what is “best use” for the various assets. Meanwhile, Frasers Property, which has a well managed REIT portfolio, has stated that it is open to collaborations with capital partners. Its real estate investment manager, buried inside Frasers Property, could command higher valuations as a listed entity.