Results
• Results in line. Ho Bee Investment (Ho Bee) reported 2Q12 net profit of S$72.9m (+45% yoy), bringing 1H12 net profit to S$88.7m. Core 1H12 net profit of S$74m (excluding S$18m gain from disposal of industrial property One Tannery) was in line with our expectations, representing 51% of our full-year forecast.
• Gross margin for 2Q12 increased 1.7ppt to 44.5% on the back of higher margins from its industrial and residential development projects.
• Property development accounted for 95% of total revenue, followed by property investment (3%) and hotel (2%).
• Net asset value rose 3% to S$2.40/share (S$2.34 at end-11)
Stock Impact
• Maiden acquisition of two small prime residential sites in Australia. Ho Bee recently announced the acquisition of two prime residential sites in Gold Coast, Australia for A$30m. The first site is located at surfers Paradise Boulevard (freehold, priced at A$10m) and can yield about 154 units. The second site is located at Broad Beach (freehold, priced at: A$20m) and can be developed into a high-rise residential with some retail space. The Australian exposure accounts for about 2% of its gross asset value. We expect an RNAV accretion of about S$10m from the developments.
• Restructuring its investment property portfolio. In 1H12, Ho Bee sold its industrial building One Tannery for S$47m, realising a gain of S$18m or a 5-cent accretion to our RNAV. The group has been constantly rationalising its investment portfolio after acquiring prime commercial portfolio in The Metropolis in North Buona vista drive. Construction of the project is progressing well with the site expected to come on-stream by end-13. We understand the leasing activity for the anchor tenants commenced recently with rentals expected at S$6-8psf pm.
• Slight pick-up in high-end sales in 2Q12. Sales in the high-end segment showed a slight pick-up in2Q12 with Ho Bee managing to sell about 10 units vs just one unit sold in 1Q12. Ho Bee’s current launches Trilight, Seascape and The Orange Grove are 97%, 29% and 83% sold at an ASP of about S$1,750psf, S$2,700psf and S$2,350psf respectively.
• Strong balance sheet to weather slowdown. Net gearing dropped further to 0.26x (1Q12: 0.27x), providing sufficient cushion to weather a potential slowdown in the high-end segment. Assuming a comfortable gearing of 0.5x, Ho Bee has additional debt headroom of about S$400m to capitalise on acquisition opportunities in Singapore and China.
• Trading deep in value. Ho Bee is currently trading at a very low P/B of 0.52x, a steep 45% discount to its long-term P/B of 0.9x, and a deep discount of 53% to our RNAV, vs 30-40% discounts for peers. We believe the market is pricing in an over 40% fall in Ho Bee's assets at current share price levels, which is unjustified. Earnings Revision/Risk • We fine-tune our 2012-14 net profit forecasts by 1-2% by adjusting our earnings from its Singapore residential projects.
Valuation/Recommendation
• Maintain BUY and we raise our target price to S$1.86 (from S$1.80), pegged at a 30% discount to our revised RNAV. We raise our RNAV by 4% to S$2.65/share, factoring in the contribution from the Australian acquisition and the gains from the sale of One Tannery.
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