Ho Bee Investment

Maybank Kim Eng Research, Aug 13

HO BEE reported a Q2 2013 net profit of S$26.2 million (-50 per cent q-o-q; -64 per cent y-o-y). Excluding one-offs (predominantly the S$25.9 million gain from the sale of Hotel Windsor), it would have barely broken even with a profit after tax and minority interests of S$0.1 million due to a lack of residential sales.

Nonetheless, we maintain our "buy" recommendation as Ho Bee's recurrent income base is set to improve significantly next year with the completion of The Metropolis. The target price remains at S$2.66, pegged to a 30 per cent discount to RNAV.

In Q2 2013, Ho Bee recognised a mere S$3.3 million of revenue from property development, mainly as its inventory at Sentosa Cove remained largely unsold. Its management expects the Singapore residential market to remain uncertain and challenging, on the back of the cooling measures and the impending supply glut.

Recurrent income will improve earnings quality. Ho Bee's H1 2013 headline profit may be S$78.4 million, but core earnings are estimated at a mere S$3.8 million.

This is set to change as The Metropolis, now already 82 per cent pre-committed, will be completed in October 2013, and we expect net profit contributions of about S$50 million annually when fully leased.

In addition, Ho Bee in May purchased Rose Court in London, which boasts the UK's Secretary of State for Communities and Local Government as its sole tenant.

Together, they will underpin Ho Bee's core earnings base to a tune of about S$55 million (61 per cent of our FY2014 forecast) on a stabilised basis.

Last month, Ho Bee announced that it has acquired its fourth residential site in Australia. It picked up a 0.5-hectare site in Doncaster, Victoria, for a mere A$8.5 million (S$9.8 million) and will be developing 185 apartments.

Ho Bee's Australian landbank now totals nearly 1.1 million sq ft in gross floor area from the four sites, but we expect earnings contributions to begin only from FY2017, as profits can only be recognised upon full completion.

With a stronger recurrent income base over the horizon and the fact that Ho Bee can bide its time with its Sentosa Cove units, we believe that the stock remains attractive. Our target price of S$2.66 offers a potential upside of 21.5 per cent.

BUY