Ho Bee Land (HOBEE SP) - Maybank Kim Eng 2017-02-28: Stable earnings outlook

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HO BEE LAND LIMITED H13.SI

Ho Bee Land (HOBEE SP) - Stable earnings outlook

TP raised 16%; Maintain HOLD, prefer UOL 

• FY16 net income was broadly in line with our estimate as lower-than-expected contributions from its residential projects in Australia were offset by higher income from associates. 
• Importantly, the company cut the DPS by 1 ct to 6 SGD cts. 
• Our TP is raised 16% to SGD2.47 based on a 39% discount to RNAV of SGD4.06 after we roll forward our valuation to FY17 and incorporate the sale of Rose Court. Maintain HOLD. 
• We think downside risks to capital values of its UK office assets and the lack of sales visibility for its unsold stock in Sentosa and Australia could continue to weigh on market sentiment. 
• We prefer UOL (BUY, TP SGD7.68) for its stronger development earnings visibility and more attractive ROEs.

DPS cut 

• It cut the DPS by 1 ct and proposed a final payout of 6 SGD cts. This is inline with the overall decline in profitability. 
• Nonetheless, Ho Bee’s recurring income base remains strong with investment properties from Singapore and UK accounting for 81% of gross profit. 
• Despite the challenging office market in Singapore, valuation of The Metropolis was raised by SGD1,782m or c.SGD1,649 psf NLA.

Brexit concerns to weigh on value of UK offices 

• Ho Bee recently announced the sale of Rose Court, one of the first office properties it bought in London. Its sale price of GBP94.5m translates into an annualised gain of 10% over its initial purchase price of GBP67.2m in June 2013. It has five other UK office properties worth approximately SGD918m on its books. 
• With Brexit, we believe there could be downside risks to the value of these assets and we have built in a conservative 10% discount to their carrying value in our valuation.

Stable outlook with strong recurring income streams 

• With a large recurring income stream from its portfolio of investment properties, we believe Ho Bee offers a relatively stable earnings outlook for investors. However, the lack of sales visibility for its unsold residential stock in Sentosa and Australia, and low earnings yield from the investment properties implies that returns on equity could stay low in the near term. 
• Maintain HOLD.

Swing Factors

Upside

• Privatisation offer by major shareholder who already owns over 70% of the company.
• Strong rebound in luxury home market in Sentosa.
• Profitable sale of investment properties.

Downside

• Sharp fall in value of office properties in UK and Singapore.
• Overpaying for development land.
• Poor execution of overseas projects.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-28

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 2.47 Up 2.130