Wharf Holdings net profit drops 32% y/y to HK$8.2b

What's the main source of disappointment?

Wharf Holdings’ FY2014 results were below expectations with China property development the key source of disappointment.

According to a research note from Barclays, underlying net profit declined by 32% y/y to HK$8,247mn and missed Barclays' HK$10,708mn forecast.

Included in the results was HK$1,998mn of impairment provisions for China development projects. Excluding the provisions, Wharf’s core earnings declined by 7% y/y to HK$10,474mn.

By segment, China development was the main source of disappointment as margin compression and impairment charges more than offset the continued strength of Wharf’s rental operations.

Here's more from Barclays:

Reflecting the weaker China development margins and a less ambitious sales and development outlook, we are cutting our FY15 and FY16 earnings estimates by 1% and 9% respectively.

Flowing through the lower ASP assumptions to our NAV, we also cut our spot and forward NAV estimates by 2% and 4% to HK$103.04 and HK$104.54 respectively.

With China development outlook still challenging and Hong Kong retail sales headwinds picking up, we are widening our target discount for Wharf to 50% from 40% and revise down our price target by 20% to HK$52.30.

Overall, although Wharf’s business outlook remains uncertain, with dividend yield now approaching 3.6% (versus HK Land at 2.5% and Swire Prop at 2.7%), we believe there should be some valuation support.

There is no change to our EW rating but among the landlords, we continue to prefer Hysan for both its higher yield and lower development risk.