• 1Q14 results with revenue at S$17.1 mn (-72% y-y) and PATMI at $4.1 mn (-94% y-y) due to no revenue recognised for development projects this quarter and a gain on sale of $47 mn in 1Q13
• Rental income from investment properties increased 495%, contributing 93% of the revenue
• Expect upside in rental income for coming quarter with the contribution from the new London office acquisition and rental income from The Metropolis to normalise
• Maintain at Accumulate with unchanged fair value at $2.51

What is the news?

1Q14 results revealed revenue at $17.1 mn and PATMI at $4.1 mn, a drop of 72% and 94% y-y respectively, attributed to no revenue recognition for development projects and a gain on sale of $47 mn in 1Q13. Rental income from investment properties increased 495% from $2.7 mn to $15.9 mn (93% of revenue), attributed to the rentals of The Metropolis and Rose Court. Operating expenses increased 146.9% this quarter due to fees from refinancing of loan for Metropolis.

How we view this

1Q14 revenue and PATMI had underperformed our expectations, meeting only 14% and 6% of our FY14 estimates as the rental income from The Metropolis had yet to contribute to its full potential since some of the tenants will only be moving into the premises later this year. Rental income should improve in coming quarters with more tenants moving into The Metropolis which is currently 94% leased and contribution from the new London office acquisition 1 St Martin Le Grand. We believe the sentiment for high-end residential sales would remain sluggish and there would be no significant residential sales contribution for Ho Bee this year.

We expect Ho Bee to launch the overseas China and Australia residential projects (Pearl, Melbourne and Rhapsody, Gold Coast) this year and development income from these residential projects to contribute significantly towards Ho Bee’s earnings in FY2015/2016.

Looking ahead, in the face of the headwinds in local property market, Ho Bee will explore for investment opportunities overseas (residential development sites in Australia and commercial properties in London) in near term to grow its property development and investment business.

Investment Action

As the expected effective occupancy rate for The Metropolis for 2014 is lower than previously assumed, we have revised the revenue and net profit downwards by 15% and 24% for FY2014. We maintain our Accumulate rating with TP at $2.51, pegged to 35% discount to RNAV.

Source: Phillip Securities Research - 30 Apr 2014