UOBKayHian Research 2015-06-11: Maintain BUY for Ho Bee Land

Meeting with management suggests that the group’s London properties look poised to contribute significantly to recurring income over the next few years. Ho Bee’s very sizeable commercial portfolio (well in excess of S$2b) could also well pave the way for a commercial REIT spin-off. With a high trading discount to RNAV and a low free float (<25%), Ho Bee remains a palatable candidate for privatisation plays. Given its past actions which have proved prescient, we think this is one developer to watch. Maintain BUY with a target price of S$2.86.

WHAT’S NEW

We visited the company to gain more insight on its strategies amidst its overseas forays. Last year’s London acquisitions look to inject greater stability into the company’s earnings as it transits from developer to landlord.

STOCK IMPACT

London properties to jumpstart growth.
Yields for 1 St Martin’s Le Grand and 60 St Martins Lane stand at about 5-5.5% and 4.5% respectively. Both properties were acquired for a combined sum of £214.9m in 2014. 1 St Martin's has a long tenancy lease of 12 years, while 60 St Martins will see its lease renewal in 5-6 years. Rose Court, which is due for rental review next year, could see yields improve to about 6% from 4.5-5% currently. Post-expiry of the sole lease in 3.5 years could well lead to building redevelopment (potentially mixed-use), which could see reversions hitting highs of 40%. Although the lease for 1 St Martin’s expires in 12 years, management expects rental reversions at the next rental review to peak at 20%.
Current commercial portfolio estimated in excess of S$2.1b, opportunities beckon for a REIT.
With the acquisition of two additional commercial properties in London last year, the possibility of a commercial REIT spin-off looks increasingly distinct. Ho Bee’s commercial portfolio stands at approximately S$2.2b, propelled by The Metropolis (S$1.5b), which saw valuation gains of $270m as of end-14. Committed occupancy at The Metropolis has reached 98% by NLA, with current asking rents at S$7-8 psf pm. We reckon that future commercial acquisitions are likely to be the tipping point for the establishment of a commercial REIT, with potential significant revaluation gains adding further impetus for capital recycling.
Knack for entry and exit.
The company has shown itself to be extremely adept in reading the signs of an upswing or downturn. It entered London in 1996 when the Singapore property market was at an all-time peak and London property prices were still recovering after bottoming out at end-92. The timely entry to London and accomplishment of projects like Parliament View and Garrick House helped Ho Bee build its reputation as a high-end developer and survive the recession in Singapore. In 2003, Ho Bee acquired land in Sentosa, refocusing on Singapore at a time when property prices in Singapore were bottoming out. Ho Bee’s recent forays in London again look prescient in light of tailwinds on the residential front.
Not the end of the road yet for development.
Although the company has no concrete development plans yet domestically, the same cannot be said overseas. Management has commenced construction work on its Melbourne and Gold Coast residential projects. Pearl (Melbourne) is due for completion by 2Q16, while Rhapsody (Gold Coast) should be ready come 2016. Sales of both projects stand at 65% and 15% respectively.
Wait-and-see approach for Sentosa projects.
Management noted that the property market in Singapore is expected to face stronger headwinds in 2015. 1Q15 private home prices continued on its downward trend, falling 1.0% qoq, slowing from a 1.1% fall in 4Q14 while prices of resale HDB flats fell by 1.0%. Private residential prices and public housing prices are down 5.8% and 9.2% from their respective peaks. We expect that after a healthy 10-15% correction (from peak), prices should trend in line with GDP growth (2- 4%). Management has opted to rent out the bulk of unsold units at its Sentosa projects (Turquoise, Seascape & Cape Royale) to rise through the weak home-buying sentiment, especially in the high-end segment.

EARNINGS REVISION/RISKS

Continued headwinds in the residential market, particularly high-end property.
Slowdown in overseas markets.

VALUATION/RECOMMENDATION

Maintain BUY with a target price of S$2.86 pegged at a 25% discount to our RNAV of S$3.81/share. The RNAV mainly factors higher valuation for investment properties and reduced share base. We believe the easing of demand-side policy measures is on the cards post a 10-15% correction in property prices.