PETALING JAYA, July 11: Affin Hwang Capital has downgraded its call on Amcorp Properties Bhd (AmProp) to “hold” due to a delay in the group’s Campden Hill project in London and the risks on property demand in the UK following the Brexit vote.
“With more than 90% of AmProp’s earnings derived from London, we believe Brexit would raise uncertainty over the future sales at least over the near term. While impact is likely still too early to be ascertained, management guided that buyers had already been more cautious leading to the event,” it said in its research note last Friday.
“With Brexit, commercial property demand could be uncertain should there be any relocation of headquarters of either European banks or multinational companies. This would inadvertently have a knock on effect on residential property,” it added.
However, it expects London’s “charm and offerings” in terms of its regulatory framework, language and culture to mitigate any sharp adverse impact.
On the Campden Hill project in Kensington, London, Affin Hwang Capital said the completion has been slightly delayed due to conflicting views over the materials to be used for finishing.
The contractor has thus sought an extension of time and the 72-unit project comprising four blocks is now only expected to be partially completed in February 2017, as opposed to the initial scheduled completion by late 2016. The remainder of the project will only be completed in March 2017.
“This means that the recognition of portion of profits will fall into the subsequent financial year, as the handover of keys for the second phase would likely happen only in April 2017,” it said.
Following the delay, Affin Hwang Capital cut AmProp’s FY17E earnings per share (EPS) by 28% due to the partial completion. Its earnings downgrade also takes into account a weaker exchange rate assumption of RM5.50/sterling (previously RM6/sterling).
“Any further 1% depreciation of the sterling against the ringgit from our revised assumption will reduce our FY17-19E EPS by 0.7% to 0.8%. Based on an unchanged DPS payout ratio of 40%, we also adjust our FY17E DPS downwards to 5.2 sen (previously 7.1 sen),” it added.
Despite a portion of the Campden Hill project being pushed into the next financial year, it trimmed its FY18E EPS by 6%, largely impacted by the weaker sterling currency assumption.
However, it still expects FY18 to be a significantly stronger year in terms of earnings, with 91% EPS growth year-on-year, driven by the completion of The Burlington Gate project in Mayfair, London and partial completion of Campden Hill.
The Burlington Gate project is slated for completion by 1Q2018 and the current take-up rate for the project has already exceeded 90%.
Affin Hwang Capital said the group’s project pipeline remains strong with several new projects tentatively coming on stream after FY18 including the acquisition and redevelopment of Kilmuir House in Belgravia, which will be joined by the Bankside Quarters development, in which Temasek of Singapore is a partner.
“While the long term prospects remain intact particularly given the strategic location of its properties, we think that negative sentiment could weigh on the stock in the near term. With more than 90% of group earnings derived from London, future sales and thus earnings will remain at risk with the onset of Brexit, apart from property completion risk.
“Nearer term, as earnings are only realised upon project completion, quarterly earnings in the coming quarters will be absent and will only kick in, in the final quarter of FY17E, which could possibly stretch investors’ patience on the stock,” it said.
In view of the current headwinds and increased risk, it raised its discount to RNAV for the property segment from 30% to 60% and cut its target price (TP) to 89 sen from RM1.54 previously.
“We estimate that the implied discount to the property segment’s RNAV is closer to 63% currently and has ranged between 55% and 65% over the past year. With the TP revision and increased risk profile, we downgrade the stock to a ‘hold’ from a ‘buy’,” it said.
— THE SUN