Ho Bee Land - UOB Kay Hian 2020-10-19: Strong Recurring-income Engine; Re-initiate Coverage With BUY


Ho Bee Land - Strong Recurring-income Engine; Re-initiate Coverage With BUY

  • Ho Bee Land trades at an undemanding 0.41x 2020F P/B, representing a 32%/43% discount to SG developers/ office REITs.
  • Ho Bee Land has a S$4.6b commercial portfolio concentrated in quality office assets in the gateway cities of London (41%) and Singapore (34%) in GAV terms, and generate recurring earnings (99% of 2019 gross profit).
  • Catalysts to Ho Bee Land's share price include a potential REIT spin-off, share buyback and deployment of debt headroom.
  • Re-initiate coverage on Ho Bee Land with BUY with target price pegged at 40% discount to RNAV.

Ho Bee Land - Company Background

Strategic re-focus on generating recurring income.

  • After the 2007-09 global financial crisis, Ho Bee Land recognised the need to build a more sustainable earnings model (less dependent on development income). As a result, it strategically focused resources on the purchase and development of commercial properties, primarily in Singapore and the UK, to boost its recurring income.
  • In 2010, Ho Bee Land jump-started with a 1.2m-sf office development (The Metropolis) at the one-north enclave in Singapore. In 2012, it also expanded into Australia via the acquisition of two prime residential sites in Gold Coast, and one residential site in Doncaster.
  • Ho Bee Land’s 5-10-year plan in Australia is to become one of the major residential land developers along the east coast, focusing on Melbourne, Sydney, and Brisbane. Management is focused on maximising returns on capital already deployed in Australia, and naturally its Gold Coast landbank (Broadbeach) will be part of that focus.
  • In 2013-19, Ho Bee Land also added seven office buildings in London to its commercial portfolio.

Associates and joint ventures.

  • Ho Bee Land has 50%, 40% and 20% stakes in its China associates/JVs with Yanlord in their Tangshan, Changyuan and Zhuhai residential projects respectively. The Tangsha project will see handover of its Phase II (comprising 1,200 units, 100% sold) in 2021. The Changyuan project (1,470 units) has been completed and nearly 98% sold as at end-19. Lastly, 71% of the Zhuhai project (3,669 units) were sold as at end-19.
  • In Sentosa, Ho Bee Land has 50% and 35% stakes in Seascape (65% unsold, total: 100 units) and Cape Royale (not launched, total: 302 units) respectively, which are more than 80% leased, bringing in steady recurring rental income.
  • See Appendix II in the PDF report attached below for the list of Ho Bee Land's property portfolio.

Ho Bee Land's Management Team

  • Chairman and Chief Executive Officer: Dr Chua Thian Poh
  • Executive Director and Chief Operating Officer: Mr Ong Chong Hua
  • Deputy Chief Executive Officer: Mr Nicholas Chua
  • Chief Executive Officer (Australia): Mr Michael Vinodolac
  • Group Director (Projects and Marketing): Mr Chong Hock Chang
  • Financial Controller: Ms Josephine Lee
  • See Appendix IV in the PDF report attached below for background of the managenent team.

Ho Bee Land - Investment Highlights

Stable dividend yield underpinned by solid recurring-income, long WALE and diversified revenue base.

  • We forecast a healthy 4.4% dividend yield for Ho Bee Land's 2021F, underpinned by recurring earnings from investment properties (99% of 2019 gross profit) across the UK (52%), Singapore (45%) and Australia (2%) with long WALE (UK: 5 years/ Singapore: 2-3 years).
  • Ho Bee Land steadily grew its recurring income stream at a 38% CAGR in 2013-19 through inorganic growth. Its current investment portfolio of predominantly freehold office buildings in London (7) with the exception of 110 Park Street (125-year lease), and The Metropolis (Singapore, 99-year lease) which is 100% leased will provide recurrent income over the next two years to mitigate the COVID-19 impact. Positive rental reversion is expected for its office portfolio going into 2021 as expiring rents for its 2021F UK leases remain competitive (3-5% below current market asking prices).

Other income-generating investment properties in Singapore

  • Ho Bee Land's other income-generating investment properties in Singapore include a petrol station (623A Bukit Timah Rd/999-year), two retail units (Eastwood Centre/99-year) and industrial buildings (HB Centre 1&2/freehold). Management has also rented out more than 80% of its unsold Sentosa inventories, Turquoise (47% sold/total: 48 units), Seascape (35% sold/total: 100 units) and Cape Royale (not launched/total: 302 units) in the interim on two-year leases, which have seen minimal impact on occupancies due to the pandemic.
  • Ho Bee Land's management is looking to divest its Sentosa properties at an opportune time, which we believe could see some renewed buying interest in the medium term from the upcoming Resort World Sentosa's expansion plans and Greater Southern Waterfront plans. Importantly, the Sentosa inventories will not inccur Qualifying Certificate (QC) extension charges and Additional Buyer Stamp Duty (ABSD) for the group.

Current commercial portfolio worth in excess of S$4b; opportunities beckon for an office REIT spin-off amid tumultuous times.

  • Ho Bee Land’s office portfolio comprising The Metropolis in Buona Vista (S$2.0b) in Singapore and seven other UK office properties (1 St Martin’s Le Grand, 60 St Martin’s Lane, 39 Victoria Street, 110 Park Street, Apollo & Lunar House, 67 Lombard Street and Ropemaker Place) were carefully curated, since its shift in strategic focus from development to investment projects, and from Singapore to overseas.
  • The recent successful listing of Elite Commercial REIT (SGX:MXNU) (6 Feb 20), and Prime US REIT (SGX:OXMU) (19 Jul 19) highlight investors’ appetite for stable-yielding office assets underpinned by long WALEs, amid uncertainties stemming from the COVID-19 pandemic and US-China trade tensions.

Shareholder friendly capital returns and privatisation potential.

  • In 2018-19, Ho Bee Land paid S$67m in dividends (10 S cents/share) annually. See Ho Bee Land's Dividend History. Since 2011, Ho Bee Land returned more capital to shareholders through buybacks and dividends totalling S$56m per year on average in 2011-19 (vs S$19.4m per year in 2006-10) even as its largest shareholder (the Chua family) continued to raise its stake.
  • Ho Bee Land remains a palatable candidate for privatisation, given the Chua family’s substantial stake of 75% and current attractive valuations, trading at 59% below our RNAV (and 0.41x 2020F P/B). Although privatisation remains a longer-term event, any related newsflow may lift Ho Bee Land's share price.

Sector-leading ROA attributed to astute landbanking and acquisitions of office buildings.

  • Ho Bee Land’s above-sector ROE is attributed to its sector-leading ROA of 5.4% (vs peers’ 2.5%) in 2015-19, indicating its ability to deliver good shareholders’ returns without over leveraging.
  • Ho Bee Land’s early and strategic shift to concentrate resources on commerical properties in Singapore and the UK to boost its recurring income cushioned it against headwinds faced by its Singapore peers in the residential property market (on the back of the government’s cooling measures). Management prefers developing commerical sites and white sites from which it can derive recurring income.
  • Ho Bee Land’s strategy was jumpstarted with acquisition of The Metropolis site (yielding 1.2m sf GFA) for S$411m (S$342psf) in 2010 when the one-north precinct was still an untested location for office developments. While management was targeting office rents of around S$5psf initially, The Metroplis exceeded expectations with recent asking rents of around S$8.70psf.
  • Ho Bee Land also has an demonstrable record in London where it acquired trophy office assets, such as Rose Court in 2013 (which was constructed over the Rose Theatre) and 1 St Martin’s Le Grand (originally the General Post Office of London). As a testament to its asset quality and tenant profile, Ho Bee Land had consistently recognised fair-value gains on investment properties of an average of S$163m per year (45% of group PBT) in 2010-19.
  • Ho Bee Land’s successful S$223.6m tender for Biopolis Phase 6 is expected to further bolster its recurring income. When completed in 2022, the Singapore project will add 445,259sf GFA. Of this, built-up-area will be split between Biomedical Science (85%) and office/ complementary retail/F&B (15%). Upon fully leased, we estimate a net yield on cost of 5-6%, providing a further 12% (S$26m) boost to Ho Bee’s rental income.

Ho Bee Land - Valuations & Recommendation

Significantly undervalued; current share price of S$2.27/share trading at deep 59% discount to our RNAV of S$5.53/share.

  • We like Ho Bee Land for its exposure to quality office buildings in gateway cities of London and Singapore, and stable income profile underpinned by long WALE (UK: 5 years, Singapore: 2-3 years) which will help it ride out the COVID-19 pandemic.

Our target price incorporates a 40% discount to our RNAV of S$5.53/share, and implies 46% upside from current price levels.

  • The discount is in line with its historical average of 41% since 2011, but wider than the 30% that we currently apply to large-cap proxies (City Developments (SGX:C09) and CapitaLand (SGX:C31)). As industry earnings trough in the next few quarters, there may be room for the discount rate to narrow again as the industry recovers from the COVID-19 pandemic.
  • Our RNAV of S$5.53/share comprises surplus to book from investment properties (S$11.8m), NPV of development profits (S$126.2m) and current net book value (S$3,540.7m). See PDF report attached below for more details.
  • In terms of geographical asset exposure (GAV), Ho Bee Land is most concentrated across Singapore (45%) and the UK (41%), followed by China (8.1%) and Australia (5.4%). See See Appendix II in the PDF report attached below for the list of Ho Bee Land's property portfolio.

Best-in-class assets (sector-leading ROA) to boost ROE.

  • Ho Bee Land achieved marginally higher average ROE of 8.6% in 2015-19 (peers’ average: 8.1%), which could be attributed to its sector-leading average ROA of 5.4% in 2015-19.
  • Historically, Ho Bee Land's share price traded at P/B that was in line with its ROE. We believe the group has room to increase its current leverage (equity multiplier: 1.8x), which is still low compared to its other Singapore peers’ average of 2.9x.
  • Given historically low borrowing rates, Ho Bee Land has room to re-leverage and deploy its acquisition headroom into investment properties to boost its recurrent earnings (and P/B multiples).

Opportunity to accumulate ‘near SARs level’ (-0.7SD P/B).

Peihao LOKE UOB Kay Hian Research | Nicola Ho UOB Kay Hian | https://research.uobkayhian.com/ 2020-10-19
SGX Stock Analyst Report BUY INITIATE BUY 3.32 SAME 3.32