Raise EPS by 7-22% for Acquisition; Maintain BUY

• We raise FY18-20E EPS by 7-22% after incorporating Ho Bee’s recent acquisition of Ropemaker Place in the UK. This deal has put its conservative balance sheet to work and should enhance its recurring EBIT by 39%, in our estimation. The price paid appears reasonable, at a 7% discount to the vendor’s asking price and with yields at almost 50bps higher than prime office yields in the locality.
• We retain our Target Price of SGD3.30, still at a 30% discount to our revised RNAV of SGD4.74.
• Trading at a steep 50% RNAV discount, Ho Bee is the cheapest property developer in our coverage. Maintain BUY.
• Risks to our view include sharp falls in Singapore and London office prices.

Lifting UK Office Exposure

Ho Bee has raised its exposure to the UK office market to 41% of its assets from 25% after snapping up Ropemaker Place, a Grade A office building in the City of London. This 602k sf NLA freehold property is less than 200m away from the future Moorgate station due to be completed in December this year.

Annual rental income of GBP30.6m translates to a net yield of 4.7%, based on its acquisition price of GBP650m. Income visibility should be strong with a long WALE of 10.5 years or 8.5 years to break option for tenants.

The property is 96%-occupied, with Macquarie Bank, IHS Markit, Mitsubishi UFJ and The Bank of Tokyo Mitsubishi UFJ as key tenants.

Reasonable Acquisition Price

Its acquisition price is 7% below the vendor’s initial asking price of GBP700m, as reported by the media. Its acquisition yield of 4.7% is also higher than JLL’s prime yield estimates of 4.25%.

While a large base of banking and financial-service tenants may render the building more vulnerable to Brexit-vacancy risks, we believe its long committed WALE provides good earnings visibility.

Boost to Recurring Income

This acquisition has raised its annual recurring EBIT by 39% to SGD195m. After accounting for higher financing costs from this deal, we estimate incremental net profit of SGD22m.

Balance sheet remains healthy with FY18E net gearing rising to 74%, from our previous estimates of 39%.

Swing Factors 

Upside 

• Privatisation offer by major shareholder who already owns over 70% of the company. 
• Strong rebound in luxury home market in Sentosa. 
• Profitable sale of investment properties. 

Downside 

• Sharp fall in value of office properties in UK and Singapore. 
• Overpaying for development land. 
• Poor execution of overseas projects. 

Source: Maybank Kim Eng Research - 20 Jun 2018