Ho Bee Land - DBS Research 2022-08-12: More Than Just Recurring Income; Multiple Catalysts To Unlock Value

• Ho Bee Land (SGX:H13)’s 1H22 revenues increased 13.3% y-o-y to S$178.3m on the back of higher contributions from both the property development and property investment segments.
  • Revenue from the property development segment increased ~S$6.2m (or 14.5%) y-o-y to S$49.6m, mainly due to the sales of more units at Turquoise in Sentosa Cove in 1H22. Although, we believe that the bulk of the sales at Turquoise has already been recognised in the past few quarters. Meanwhile, Ho Bee Land will begin recognising revenues from the sales at Cape Royale, also in Sentosa Cove.
  • Property investment revenue also increased 12.9% y-o-y to S$128.6m, mainly attributable to higher rental income following the acquisition of The Scalpel in London in March 2022. The Scalpel is a Grade A office building in the heart of London’s insurance district. The ~S$1.3bn office building was acquired at a yield of ~4%, and is expected to generate rental income of ~GBP29m per annum.

EUR44.8m gains from divestment of Munich office property

• Ho Bee Land’s other income increased to S$32.8m, mainly due to fair value gains of S$30.8m recognised from its investment in Munich Notes. The underlying office asset in Munich was divested in February 2022, and the total gains were ~EUR44.8m. Approximately half of the fair value gains were already recognised in FY21, while the remaining ~EUR20.2m (S$30.8m) was recognised in 1H22.

S$16.0m in net fair value gains on investment properties

• Net fair value gains of S$16.0m on its investment properties portfolio were recorded in 1H22, a turnaround from the S$3.7m fair value loss in 1H21. The net gain was derived as a result of the increase in the value of its Singapore portfolio, partially offset by the loss in its London portfolio.
• The fair value losses in its London portfolio would have been mainly due to the depreciation of the GBP against the S$, as well as some cap rate expansion in the London office market.

Unrealisable exchange losses and higher financing costs

• Due to the strengthening of the S$, Ho Bee Land recorded a net unrealisable exchange loss of S$12.0m. This was mainly due to the revaluation of Ho Bee Land’s net monetary assets in AUD and EUR.
• Finance costs increased 71% y-o-y to S$33.2m in 1H22. The increase was mainly due to additional bank borrowings of ~S$1.1bn used to fund the acquisition of The Scalpel and the development sites in Australia.
• Ho Bee Land’s net gearing currently stands at ~0.89 times. Additionally, the rising SONIA rates also led to higher financing costs for its GBP floating rate loans.

Share of profits from China increased 54% y-o-y

• 1H22 share of profits increased 54% y-o-y to S$16.7m, mainly contributed by profits from the Nanjing project, which started handing over units to buyers in 1H22. Its share of profits was partially offset by contribution from the Shanghai project, which has been fully recognised in FY21.
• The share of profits from jointly controlled entities decreased 84% y-o-y, mainly due to the absence of profits from Phase 2 of the Tangshan project in China that had been fully handed over to buyers in 1H21. The S$7.8m in profits of jointly controlled entities in 1H22 was largely derived from the sales of Seascape in Sentosa Cove.

EPS and NAV increased

• Due to higher profits, Ho Bee Land's EPS for 1H22 increased by more than 42% y-o-y to 22.57 cents. Ho Bee Land's NAV as at 30 June 2022 inched up to S$5.97.

Our thoughts on Ho Bee Land

• With rising rental rates and built-in rental escalations, we expect Ho Bee Land’s recurring rental income from its investment properties portfolio to continue growing. In addition, the acquisition of The Scalpel in London (March 2022) will contribute at least three quarters of rental income, estimated to be ~GBP29m on an annualised basis.
• On the development property front, we expect Ho Bee Land to continue recognising higher profits from the sales at Cape Royale in Sentosa Cove. In addition, the eight parcels of master-planned community projects in Australia are ongoing and will contribute to development profits when they are ready for sale.
• With the depreciation of the AUD, EUR, and GBP against the S$, we will be watching out for the impact of foreign exchange movements. In addition to impacting the fair value of Ho Bee Land’s portfolio, it could also impact earnings from both the development property and investment property segments.
• In 1H22, more than 26% of Ho Bee Land’s profits from development properties were derived from Australia. Given its large portfolio of investment properties in the UK, ~61% of its recurring rental income was derived from the UK in 1H22.
• Despite the exposure to foreign currency fluctuations, we continue to like Ho Bee Land for its REIT-like recurring income that contributed more than 72% of its earnings in 1H22. Moreover, the addition of The Scalpel in March 2022 will further drive recurring rental income, and rising rents and built-in rental escalations in its leases could help to mitigate some of the weakness in the foreign currencies.
• We will be maintaining our BUY recommendation on Ho Bee Land with a target price of S$3.80. Based on its latest NAV, our target price remains undemanding, as it translates to a P/B multiple of only 0.64x.