Wharf REIC: Shares Remain Attractive Despite Near-Term Challenges in Hong Kong's Retail Sector

Our fair value estimate of HKD 31 per share for narrow-moat-rated Wharf REIC is unchanged. We believe the 24% drop in share price since the end of September is due to the market pricing in fewer US federal-fund rate cuts, which could add pressure to Wharf REIC’s 2025 financing costs. We leave our finance cost assumptions unchanged, as we have only conservatively assumed a 120-basis-point cut in Wharf’s effective net interest rate from the 2024 level to 3.5% in 2025, which remains above the 2.4% in 2023. This compares with the market expectation of three more 25-basis-point cuts by July 2025, on top of the 50-basis-point and 25-basis-point reductions in September and November 2024, respectively. We continue to believe that Wharf REIC is better positioned than its peers to reap the benefits of rate cuts, as 89% of its debt is under floating rates as of June 2024. We think shares are currently attractive with a 32% discount to our valuation, supported by a 2025 dividend yield of 6.2%.