• Ho Bee has posted 2Q14 revenue at S$26.8mn (+340.1% y-y) with rental income contributions from offices in Singapore and London and net profit at S$12.2mn (-52.2%) due to Hotel disposal gain in 2013
• Expect higher recurring income from Metropolis in 2H14
• Maintain at Accumulate with revised fair value at $2.50

What is the news?

Ho Bee recorded 2Q14 revenue at S$26.8mn (+340.1% y-y) bolstered by higher contributions from offices in Singapore and London. PATMI was at S$12.2mn (-52.2% y-y) due to a gain on disposal of Hotel Windsor of $25.9mn in 2Q13 and losses from joint controlled entities. Earnings however improved 297% with higher revenue and lower expenses as compared to 1Q14. Rental income from investment properties rocketed to S$25.7mn from S$2.8mn last year, contributing 96% of the revenue in 2Q14. Net gearing remains healthy at 35%.

How we view this

1H14 revenue and PATMI were slightly below our expectations, meeting only 40% and 28% of our FY14 estimates. Though the Metropolis is currently 95% leased, it is only 68% occupied at the moment. Balance of the tenants will move in progressively later this year. Rental income should improve in coming quarters when occupancy rate improves in 2H14. Headwinds continue in the local luxury residential market with government recently indicated that policy relaxation is unlikely soon. We reckon that there would be no substantial residential sales contribution for Ho Bee this year.

Ho Bee had launched Australia residential project Pearl in Melbourne and received positive response. Management has revealed that about 60% of the 185 launched units have been sold. Due th e accounting method of revenue recognition upon completion for overseas residential projects, the development income from the residential project will boost earnings in FY2015 upon completion.

Investment Action

With positive office outlook in both Singapore and London, the recurring income of investment properties stays resilient and be the main bottom-line contributor for FY14. Ho Bee is expected to launch the overseas China projects and Gold Coast Rhapsody at end of this year. The stock is undervalued with its current 0.6x P/BV. Maintain Accumulate with revised target price of $2.50, pegged at 35% discount to RNAV $3.85.

Source: Phillip Securities Research - 12 Aug 2014