2Q13 core earnings below expectations. Ho Bee reported a 2Q13 net profit of SGD26.2m (-50% QoQ; -64% YoY). Excluding one-offs (predominantly the SGD25.9m gain from the sale of Hotel Windsor), Ho Bee would have barely broken even with a PATMI of SGD0.1m due to a lack of residential sales. Nonetheless, we maintain our BUY recommendation as Ho Bee’s recurrent income base is set to improve significantly next year with the completion of The Metropolis. TP remains at SGD2.66, pegged to a 30% discount to RNAV.

Development profits dried up. In 2Q13, Ho Bee recognized a mere SGD3.3m of revenue from property development, mainly as its inventory at Sentosa Cove remained largely unsold. Management expects the Singapore residential market to remain uncertain and challenging on the back of the cooling measures and the impending supply glut.

Recurrent income to improve earnings quality. Ho Bee’s 1H13 headline profit may be SGD78.4m, but core earnings are estimated at a mere SGD3.8m. This is set to change as The Metropolis, now already 82% pre-committed, will be completed in Oct 2013, and we expect net profit contributions of ~SGD50m annually when fully-leased. In addition, Ho Bee purchased Rose Court in London in May 2013, which boasts the UK’s Secretary of State for Communities and Local Government as its sole tenant. Together, they will underpin Ho Bee’s core earnings base to a tune of ~SGD55m (61% of our FY14 forecast) on a stabilized basis.

Early days yet for overseas residential projects. In July, Ho Bee announced that it has acquired its fourth residential site in Australia. It picked up a 0.5-ha site in Doncaster, Victoria, for a mere AUD8.5m and will be developing 185 apartments. Ho Bee’s Australian landbank now totals nearly 1.1m sq ft in GFA from the four sites, but we expect earnings contributions to begin only from FY17F onwards as profits can only be recognized upon full completion.

Still cheap, maintain BUY. With a stronger recurrent income base over the horizon, and the fact that Ho Bee can bide its time with its Sentosa Cove units, we believe that the stock remains attractive. Our TP of SGD2.66 offers a potential upside of 21.5%.

Source: Maybank Kim Eng Research - 13 Aug 2013