Ho Bee Land (HOBEE SP) - Maybank Kim Eng 2017-05-29: Undemanding Valuations

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HO BEE LAND LIMITED H13.SI

Ho Bee Land (HOBEE SP) - Undemanding Valuations

Upgrade to BUY; Attractive valuations 

• We upgrade Ho Bee to BUY and raise TP to SGD3.00 (from SGD2.60) on higher RNAV and narrower target discount of 29%. 
• The RNAV uplift stems from higher valuation of its offices. With property prices at an inflection, we expect RNAV discounts to narrow across the sector. 
• Nonetheless, we believe the stock could continue to trade at a wider RNAV discount to its peers given the relatively illiquid nature of the stock. With offices in Singapore accounting for over 40% of our valuation, we see the company as an indirect beneficiary of improving sentiments in prime office market.

Key changes and assumptions 

• We kept our ASP assumptions for unsold stock in Sentosa at SGD1,650 psf.
• While overall home prices could creep up, we believe large absolute price tags and weak secondary market prices in the locality will cap prices.
• We update our valuation for The Metropolis to factor in higher rents and occupancy levels as our earlier assumptions were too conservative. Our cap rate assumption remains unchanged at 4.00% and values the office building at c.SGD1,500 psf. This remains conservative when compared to cap rates of 3.2% for CBD offices in recent transactions.
• RNAV is raised from SGD4.07 to SGD4.23.

Investment thesis 

• Ho Bee is riding out the tough Singapore residential market well. Efforts to grow its investment portfolio in recent years have led to SGD100m+ of recurring EBIT every year. This offers earnings visibility, which offset weakness for its development business. 
• In setting our target price, we have factored in conservative assumptions for its UK offices to account for downside risks to capital values post-Brexit.

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/ 2017-05-29

Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 3.00 Up 2.600