Swire Pacific:Deep value

Attractive yield with growth, upgrade to BUY

Swire Pacific offers deep value at a 44% look-through NAV discount, andits dividend yield is one of the highest among peers (4.7% 16CL). Whilesome divisions face issues, we still expect non-property businesses inaggregate to deliver a 10% earnings Cagr over 2015-17, on growth inbeverages and Cathay. This will supplement the property portfolio, whichremains resilient. We upgrade to BUY, TP HK$102 (HK$103 earlier).

4.7% yield with 8% earnings growth

We believe Swire Properties has one of the most resilient property portfolios,while Swire Pacific offers the additional benefit of non-property growth andthe highest dividend yield among landlords (4.7% FY16CL, 4.9% FY17CL). Weforecast an earnings Cagr of 10% over 2015-17 for the non-propertydivisions, outpacing the 6% Cagr expected from Swire Properties.

Beverages lead in the non-property portfolio

In the next few years, we expect on-going value-accretive acquisitions inSwire Beverages to drive growth, as it is well-positioned to benefit from TheCoca-Cola Company’s refranchising efforts in the US. As highlighted in ourprevious note, Coke and vessels, we believe the division has the potential togrow to 20% of Swire Pacific’s NAV, overtaking Cathay to become the largestnon-property division. The recent round of earnings downgrade for CathayPacific appears to have stabilised and consensus numbers still point to a 12%earnings Cagr over 2015-17. We also expect losses in marine services toremain manageable despite dire conditions, with losses bottoming in 2016once remaining back-book contracts are rebased to prevailing market rates.

Sale of Kowloon East building to AIA at a 3.3% yield

Swire’s sale of its Kowloon East property reportedly attracted interest from anumber of buyers, led by AIA’s HK$8bn (HK$14,400psf) offer. AssumingHK$40psf rent, based on the latest Knight Frank data, the price represents a3.3% gross yield, much lower than the 5.5-6% that we have used in our NAV,hence, an implied NAV uplift of c.1.3%. This reminds of the buffer in our NAVto rising interest rates.

Upgrade to BUY

The stock trades at a 44% look-through discount. With 18% upside and 4.7%dividend yield potential, we upgrade to BUY with a HK$102 TP (earlierHK$103).