Ho Bee Land - CIMB Research 2017-08-21: Banking On Recurrent Income

HO BEE LAND LIMITED H13.SI

Ho Bee Land - Banking On Recurrent Income

Strong recurrent income platform backed by a S$3bn office portfolio.
Earnings growth to be driven by handover of China residential units, Australia projects largely sold.
We anticipate the recovery of Singapore residential market to broaden in the medium term, thus allowing HoBee to monetise its existing projects.

We re-look at our earnings estimates and RNAV after an update with Ho Bee Land's management post 2QFY17 results.
Ho Bee Land (HoBee) has transformed into a strong recurrent income platform, supported by its S$3bn commercial property portfolio, with upside from development activities in China and Australia, and in the medium term, Singapore.
In the near term, rental income should form the bulk 60-65% of EBIT, in our view.

HoBee’s 1HFY17 results showed a 53% jump in net profit to S$92.4m driven largely by strong rental revenue and higher associate contributions. It generated S$71m of rental revenue in 1H17 of which c.60% came from The Metropolis in Singapore. The remaining were derived from 5 properties in the UK.
We anticipate rental income to improve in 2H17 with the recent purchase of the Lombard St property in the UK for £92.4m.

HoBee’s business model has evolved into a steady, recurrent income model, that is backed by a strong portfolio of office property assets in UK and Singapore, valued at S$3bn, as at end Jun 17. The portfolio comprises 2m sqft of NLA of which 52% is derived from The Metropolis in Singapore. The portfolio is fully occupied and generated c.S$145m of rental revenue in FY16 or 48% of total revenue.
We expect this portfolio to continue delivering a steadily growing income base, underpinned by long leases from its UK properties. In addition, the recovery of the Singapore office market would also filter down to the well-located city fringe office properties such as The Metropolis.
We expect rental income to tick up in 2HFY17, thanks to the purchase of the Lombard St office building in Jun 17 for £92.4m.
In the longer run, we believe HoBee has the option to unlock value from these properties as it did with the Rose Court, which it sold in Feb 17 for £94.5m or 41% above its acquisition value.

Whilst Singapore residential earnings have slowed significantly, owing to the weak market over the past 3 years, HoBee is reaping the benefits of its overseas diversification strategy.
1HFY17 bottomline was boosted by recognition of profits from its China projects, namely Yanlord Western Gardens. We understand the project is about 70% sold with latest ASP reaching Rmb57,000psm. Meanwhile the Marina Peninsula development is about 60% taken up amid rising selling prices. The Tangshan development which had a slow start, is also selling well during its latest phase. We anticipate more contributions from China as more completed units are handed over.
HoBee was one of the first movers among Singapore developers to venture into the Australian property market. To date, its 2 projects – The Pearl (26 units) in Melbourne and Rhapsody (57 apartments) in Gold Coast are 94% and 80% sold respectively, with average selling prices of about A$8,000-9,000psm, for both developments.
The group has two remaining landbanks, with total GFA of 80,581sqm in Gold Coast. However, no timeline has been given for the construction and launch of these 2 sites. We have not factored in any contributions from these land parcels into our existing forecasts.

As with other developers, take-up rates for HoBee’s Singapore residential projects were affected by the weak market sentiment over the past 3 years. As the projects are completed, the group has leased out 70-80% of the units.
We believe the recovery of the residential sector in Singapore could likely broaden and this will benefit HoBee’s projects in the medium term. Meanwhile, a lack of development sites in Singapore would mean little development earnings from Singapore in the near term.

We revise our FY17-18F EPS estimates and introduce FY19F projections to update on the latest sales rates in China and Australia, push back sales rate from Singapore developments, as well as factor in contributions from new investment property acquisitions in the UK.
Our RNAV estimate is raised to S$5.21 as we tweak Singapore office cap rates, in tandem with other landlords. Our TP of S$3.39 is based on a wider 35% (previously 30%) discount to asset backing due to the slower sales performance of the Singapore projects and lack of a Singapore residential landbank.
We believe HoBee could be a proxy to the recovery in the Singapore non-CBD office and residential sectors as these 2 segments account for c.67% of the group’s gross asset value.
We retain our Add rating.

LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-08-21

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