Hotel Property Investments (HPI)

Morningstar has slapped a “buy” on Hotel Property Investments with a fair value estimate of $2.60. It says the property trust, which owns 41 pubs and seven bottle shops in Queensland and South Australia, is an attractive income stock that is flying under the radar. HPI last closed at $2.05.

“Hotel Property Investments trades at a 23 per cent discount to our fair value estimate,” Morningstar said.

“The fiscal 2015 distribution yield is 7.6 per cent, or 7.9 per cent after adjusting the share price for the second-half 2014 distribution of AUD 8.8 cents to be paid shortly (ex-dividend date is 26 June). In addition to the attractive yield, distribution growth should be strong as rents are contracted to grow at about 4 per cent per annum.

“Potential regulatory changes, a powerful tenant and a geographically concentrated portfolio of mixed-quality assets are key risks,” Morningstar noted.

“About 95 per cent of rental income is derived from supermarket giant Coles. The remaining 5 per cent is from speciality tenants located on the pub premises such as 7-Eleven and Subway.”

The broker also noted that, at 47 per cent, the company’s gearing ratio is higher than for other Australian real estate investment trusts. However: “This is not a concern considering the defensive nature of the underlying business and attractive lease structures”.

The stock has little coverage. JP Morgan last put an “overweight’ recommendation on it with a target price of $2.16 in February. Goldman Sachs ceased active coverage in December with its last rating on the stock “neutral”.

Source: Financial Review - 30 June 14