Ho Bee Land

Phillip Securities Research, March 11

HO Bee Land announced on March 7 that it would acquire a 276,792 square feet freehold property 1 St Martin's Le Grand in London for £171 million ($361 million) from Nomura Properties plc, through its wholly owned subsidiary, HB Le Grand Pte Ltd.

This property is located at the western core of the London City, with a high demand from the financial occupiers, and is easily accessible with a number of underground train stations within walking distance.

The purchase consideration will be financed by internal funds and bank borrowings. A 5 per cent cash deposit has been made and the balance payable is expected to be made on completion date March 28, 2014.

The property is currently fully let to five tenants (Mitsu & Co Europe, Pyramis Global Advisors, Julius Baer International, SS&C Technologies and Nomura International plc) with leases expiring in 8-12 years.

Ho Bee continues to diversify its portfolio risks with the second acquisition of an office property in London. We perceive this as a strategic move by Ho Bee Land in view of the lacklustre local luxurious residential market sentiment and the improving office outlook in London.

The office leasing market in London had sprung back to life since 2013 with re-emergence of leasing activities from companies with the recovery of the economy. We expect the office rental to improve over the coming years considering the scarcity of new supply in the area.

With a current passing rent in the range of £9.9 million per year (£36 per square foot), this reflects an initial yield of 5.5 per cent for the acquisition. The passing rent is about 20 per cent lower than the current asking rent of surrounding areas. We expect positive rental reversion in the range of 25 per cent in five years' time when 50 per cent of the lease are due for rental review in 2019. This will further solidify Ho Bee's recurring rental income.

We increased our FY2014-2015 EPS forecast from 8-13 per cent and RNAV to $3.86.

We reiterate our "accumulate" rating (target price: $2.51) in view of stronger recurring rental income and low gearing of 32 per cent post acquisition, which will allow Ho Bee to acquire further accretive investments should opportunities arise.

ACCUMULATE