The list of companies announcing strategic reviews just got a little longer.
Hongkong Land Holdings (SGX: H78), or HKL, is the latest company to announce its strategic review.
The blue-chip property giant saw its share price soar 15% after this announcement.
The purpose of strategic reviews is to review the company’s structure and decide on how to transform the business to maximise shareholder value.
For instance, Singapore Post (SGX: S08) unveiled its strategic review back in March this year while Singtel (SGX: Z74) provided a recent update of its strategic review which was announced back in 2021.
HKL continues this trend.
With shares hovering close to their 52-week high of US$4.67, is HKL still a screaming buy?
A long-awaited strategy update
First, let’s dig into the various aspects of the group’s strategy update.
The conclusions were obtained after rigorous interviews with more than 50 tenants and investors along with around 10 sector experts.
All board members were also interviewed while senior management held workshops to brainstorm on HKL’s future direction.
The crux of the review is to simplify HKL’s sprawling business to help drive shareholder value.
Management has identified a clear competitive positioning in ultra-premium commercial properties where the group has strengths in a commercial-led integrated model.
Its current mix of businesses lack a clear direction with its development arm attracting lower multiples, thereby depressing the value of the overall business.
HKL also intends to engage in capital recycling to realise the value from its existing portfolio of assets.
By doing so, the group can improve its return on equity (ROE) and deliver a better overall financial performance.
Strategic vision for 2035
This evolution will feed into HKL’s aim to become a leader in Asia’s cities focusing on ultra-premium commercial properties.
New investments will be made in integrated investment properties with no new investments made for “build-to-sell” assets.
These investments will be concentrated in Central in Hong Kong, Marina Bay in Singapore, and the West Bund in Shanghai.
HKL has set ambitious goals for 2035 with the objective of doubling its underlying profit before interest and taxes (PBIT).
At the same time, the group also plans to double its dividend per share over the next 11 years.
Third-party capital and capital recycling
HKL intends to make use of third-party capital to help it achieve its goals.
These parties will help provide funding to support the group’s growth ambitions and this capital can be deployed into mature and development assets.
Capital can also be deployed into listed vehicles such as REITs or private funds.
Potential capital partners include sovereign wealth funds, pension funds, and insurance companies.
HKL’s assets under management (AUM) currently stands at US$41 billion as of the end of 2023.
This AUM comprises around one-quarter third party AUM with the remaining three-quarters sitting on HKL’s balance sheet.
The intermediate goal is to grow this AUM to US$80 billion by 2030 and then to US$100 billion by 2035.
By 2035, HKL envisions that slightly more than half of its AUM will comprise third-party capital.
Capital recycling will help to fund the AUM growth as well, with HKL targeting up to US$10 billion to be recycled.
By 2027, the aim is to recycle between US$4 billion to US$6 billion of capital with this amount increasing to hit the objective of US$10 billion by 2035.
Communicating a clear capital allocation framework
Investors should be pleased to know that HKL has also articulated a clear capital allocation framework.
Cash will come from two main sources – recurrent operating cash flow along with capital recycling.
This cash will be used to strengthen HKL’s balance sheet.
The remaining cash will be used for growth investments, the payment of dividends, and share buybacks.
On dividends, HKL intends to initiate a mid-single-digit year on year increase in dividends with a target to double its current dividends by 2035.
Around 60% to 80% of its recurring income will be paid out as dividends, while up to 20% of the capital recycled will be reserved for share buybacks.
Timeline and milestones
Given the size of HKL’s portfolio, such a strategic shift will not come quickly.
Management expects the change in strategy to take “a number of years” with progress to be measured across three distinct implementation phases.
Phase One will last from now till around 2028 and will involve capital recycling and the establishment of deal sourcing and fundraising capabilities.
Management will also assess potential gateway entries.
Phase Two will be from 2028 to 2031 and involves opportunities sourcing and capital sourcing from partners and third parties.
Finally, the last phase will last from 2031 to 2035 and HKL should have its new business model in place by then that will generate a steady stream of recurring earnings and cash flow.
New projects should also come online by then and management will continue with capital and deal sourcing.
Get Smart: A step in the right direction
HKL’s strategic review has positioned the group for radical changes in the next decade.
Investors should rejoice as the group’s value proposition has been clearly elucidated along with clear objectives communicated.
It’s a step in the right direction for a solid, well-managed property group to realise value for its shareholders.
All that is needed now is patience and competent execution, and investors should see the benefits of HKL’s new strategy in the years to come.
Want to pave your child’s road to being a millionaire? Start today so they shield their money from pricey hawker meals and sky-high HDB costs. The first step is to set aside money to invest in dividend stocks. The second step is to grab a copy of our latest FREE report. Inside, we show you the secrets to investing for your children, including 3 SGX stocks to consider today for a wealthier future. Click HERE to download a copy now.
Disclosure: Royston Yang does not own shares in any of the companies mentioned.
