Why 2015 poses a challenge for Kerry Properties

Despite solid FY14 results.

For Kerry Properties, it has been noted that FY14 results were a beat, driven by an improved contribution from Jing An Kerry Centre.

According to a research note from Barclays, it was also helped by the disposal gain from Lions Rise mall.

Despite the solid results this time, Barclays believe investors will be concerned about the uncertainty in FY15 earnings and the related gearing issue if contract sales fall short of the HK$12bn target.

Barclays raises FY15/16E earnings by 6%/12% after rebasing Jing An rentals, and now expects flat dividend in the next two years.

Here's more from Barclays:

Flat dividend was a surprise: FY14 earnings of HK$4.4bn is 7% and 12% better than ours and consensus expectations. The beat mainly came from net rentals that grew 57% y/y and was 19% ahead of our estimates due to the new contribution of Jing An Kerry Centre in Shanghai.

It was also helped by the HK$1.38bn disposal of Lions Rise mall. As earnings were mostly flat (-1% y/y), it declared HK$0.60 final dividend, which makes up for the dividend cut in 1H14 and results in an unchanged full-year dividend of HK$0.90.

Contract sales to determine FY15 earnings and gearing: Kerry sets a sales target of HK$12bn for FY15, with HK$6bn from Hong Kong and HK$6bn from China. Against this, it should see capex of HK$16.5bn. FY15E earnings should largely depend on the progress of Hong Kong inventory sales as Dragons Range is the only project to have been completed and booked. If the market either in Hong Kong or in China becomes less accommodative, Kerry may see gearing rise from the current 28.5% level due to the HK$16.5bn capex budget.

Raise earnings, NAV and price target: To reflect better-than-expected rentals from Jing An, we raise FY15/16E earnings by 6%/12% and our spot and forward NAV by 1% to HK$58.9 and HK$56.0, respectively. We keep our target discount unchanged at 50% and this would put our price target to HK$28.0, up 1%.

Risks: Downside risks include potential increase in gearing. Upside risk include a rebound in the China residential market.

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