Company visit reinforces our positive view on Ho Bee that it is trading at a deep 37% discount to its RNAV (0.7x P/B) despite the recent run-up. The strong share buybacks signal deep value and privatisation potential. Preleasing activity for The Metropolis remains strong. Maintain BUY with target price of S$2.12/share. Key catalysts include ongoing leasing momentum for The Metropolis, Sentosa sales pick-up and new acquisitions.
What’s New
- We recently met Ho Bee’s management to get an update on their operations. The key takeaways from our discussions are as follows.
Stock Impact
- Healthy leasing demand for The Metropolis. Management noted that the preleasing activity for the upcoming The Metropolis (NLA > 1msf) has been strong with leasing negotiations at advanced stages for major tenants like Shell, NOL, P&G and SGX. Management expects about 50% of the space to be pre-committed by end-12. To-date, Ho Bee has signed Fitness First (12,600sf) and 50% of retail space (total: 21,000sf) is precommitted. The rental guidance for anchor tenants are in the ~S$5.50- 7psf pm range. Construction of the two towers is expected to be completed by 2H13. Management also noted cost savings from lower financing and construction costs with total development costs at S$800m instead of the previously quoted S$1b.
- Rationalising its investment portfolio. Ho Bee has been very active in rationalising its investment portfolio over the last two years with acquisition of The Metropolis. The latest divestment being Hotel Windsor, divested at a 20% premium to latest valuations of S$135m. Management expects the earnings vacuum from divested properties to be filled from the operations of The Metropolis. The office project is expected to contribute an annual recurring income of S$50m-70m once fully functional.
- Strong share buybacks signals deep value and privatisation potential. Management has been actively doing share buybacks in the last two years (bought back ~6% of the shares outstanding) in the price range of S$0.98-1.53/share, signaling deep value. The recent share buybacks (Nov 12) were done in the price range of S$1.48-1.53/share. The strong buybacks fuels the possibility of a potential privatisation amid current low interest rate environment although management has denied any such possibilities.
- To launch Tangshan and Australia projects in 2013. Management intends to launch the ‘Tangshan site’ in which it has a 40% stake in 1H13 with expected ASP of about Rmb10,000psm. The other two China projects will be launched in 2014. Management will also be launching its two recent acquisitions in Australia and The Pinnacle site in Singapore during 2013 depending on the market conditions.
- Healthy debt headroom to tap acquisiton opportunites. Ho Bee’s net gearing as of 3Q12 remains low at 0.23x, providing healthy headroom of ~S$0.5b (assuming comfortable gearing of 0.5x) for acquisitions. The gearing is expected to further come down with the cash proceeds from the sale of ‘Hotel Windsor’ during 1Q13. Management is currently looking actively for acquisition opportunities in Australia, Singapore, UK and China.
- Valuation remains attractive at 0.7x P/B despite recent run-up. Despite the stock moving up 41% ytd, Ho Bee is trading at a low P/B of 0.7x, a 19% discount to its long-term mean P/B of 0.9x and a 37% discount to its RNAV of S$2.82 a share. We believe that the market is pricing in over 30% fall in its assets, which is unjustified.
Earnings Revision/Risk
- No changes to our earnings estimates.
Valuation/Recommendation
- Maintain BUY, target price of S$2.12/share, pegged at a 30% discount to our RNAV of S$2.82/share. Ho Bee is currently trading at a steep discount of 37% to its RNAV compared to its peers which are trading at a discount of 25-30%.
No comments:
Post a Comment