• FY13 PATMI at S$592 mn (216% y-y) due mainly to the revaluation gain from the newly completed office, The Metropolis
• FY13  Revenue at $139 mn  (-69.8% y-y) due to higher revenue recognition on residential project and industrial project in 2012
• Expect  headwinds  in  local  residential  market  in  near  term  with  anticipated rise in interest rates and cooling measures unlikely to loosen soon
• Focus on both development and investment income for future growth
• Propose Dividend of 8 cents per share
• Maintain at Accumulate with revised fair value to $2.48

What is the news?

Ho Bee reported its FY13 PATMI at $592 mn, increased 216%y-y attributed to the revaluation gain of $489.6 mn from The Metropolis and the gain of $47.2 mn from the disposal of shares in Chongbang Holdings.  Property  development revenue fell 75% from $450.7 mn in 2012 to $113.6 mn this year. This is due to higher revenue recognition on residential project, Trilight and industrial project, One Pemimpin in 2012 coupled with sluggish demand for luxurious residential. Property investment income increased 135% to $25.7 mn with contributions from The Metropolis and Rose Court which was acquired in mid 2013. A first and final dividend of 5 cents and a special dividend of 3 cents per share was proposed.

How we view this

Overall, the results were within our expectations with  top line meet  95% of our estimates  and  bottom  line  exceeded  our  estimates  by  about  20%  due  to  lower taxes reported.

Currently  most  of the  unsold  inventory  came  from  the  Sentosa projects. On  the back  of  the  cooling  measures,  the  forthcoming  supply  glut  and  the  anticipated increase  of  interest  rates,  we  expect  the  local  residential  market  sentiment  to remain challenging in near term and luxury residential sales to be stagnant. With its strong balance sheet, Ho Bee can on hold its Sentosa units for favourable sales pricing  and  adopt  the  strategy  of  leasing  the  unsold  Sentosa  inventory.  Per  our understanding, about 90% of Turquoise and Seascape units have been leased.

Moving forward, rental income will improve and be the lead earnings contributor in  2014.  With  the  completion  of  Metropolis  and  acquisition  of  Rose  Court, together,  they  will  contribute  to  65%  of  our  FY14  revenue  forecast.  We  are optimistic on the earning growth potential from the commercial properties due to positive local office outlook and positive rental  reversion upon lease renewal for Rose Court in 2018. Ho Bee will launch its residential projects in Melbourne and Gold  Coast  this  year.  We  expect  earnings  recognition  from  overseas  projects  in China and Australia to begin in 4Q14 and FY16 onwards respectively.

Investment Action

As  coverage  is  transferred  from  previous  analyst,  our  forecasts  are  revised  and FY14  estimates are introduced. The stock remains attractive with its last closing at $2.15, over 40% discount to our FY14  RNAV $3.82. We maintain our Accumulate rating in view of stronger recurring rental income and  higher  TP  of  $2.48, pegged to a narrower 35% discount to RNAV to factor the promising growth in investment income. Potential Catalyst: Turnaround in the local luxury residential sales.

Source: Phillip Securities Research - 28 Feb 2014