Link REIT Earnings: Cutting Fair Value by 24% as Northbound Travel Puts Pressure on HK Retail Assets
No-moat Link REIT’s fiscal 2024 (ending March) results were within our expectations, with 11% year-on-year revenue growth driven by full-year contribution of the newly acquired Singapore retail assets. Distributable income increased by a smaller 6% year on year due to higher financing costs. Despite the in-line results, we cut our fair value estimate to HKD 45 per share from HKD 59, and raised our Morningstar Uncertainty Rating to Medium from Low. In our view, there is a structural shift in Hong Kong residents' retail consumption habits, as traveling up to mainland China for cheaper goods and services has become a regular activity for part of the population. This creates higher operating risks for Link’s Hong Kong retail malls, as they now face greater competition for shopper traffic and tenant sales. Our updated forecasts reflect 1) weaker midcycle retail rental growth in Hong Kong; 2) margin pressure given higher Hong Kong marketing costs; 3) increased fiscal 2025-26 financing costs; 4) higher exit capitalization rates for the investment properties portfolio on the back of a higher-for-longer interest-rate environment; and 5) increased perceived risks on rentals. We also raised our cost of equity assumption to reflect Link’s higher operating risk, bringing our weighted average cost of capital to 7.6% from 6.9%.