Ho Bee Land - Value Property Buy?
Ho Bee Land
Description
Long: HO BEE LAND LIMITED (H13.SI)
Ho Bee Land (HBL) is a real estate investment and development company in Singapore that is currently trading at an attractive valuation today. The majority of HBL’s earnings and value are derived from the various properties it owns and develops which are geographically segmented within Singapore, China, the United Kingdom and Australia, with a solid business model supported by its strong flow of recurring income (generated S$145million from rental income which makes up 48% of total revenue in 2016). While the Brexit saga in the UK had resulted in a challenging property market and large exchange loss due to the severe weakening of the Sterling Pound, HBL’s business has proven to be resilient as its London commercial properties are situated in attractive locations and enjoy long leases. Thus, with the property sector in these countries mainly recovering and growing, coupled with the desirable locations of the asset properties, much value remains to be unlocked.
HBL is well-guided by a Board of Directors whereby all directors have years of real estate experience, and with the holding company owning about 74%, there is still a long run way for growth as HBL seeks to strengthen its recurring income business model by acquiring commercial properties in attractive locations and continue to scout for development opportunities in both the local and overseas market. Currently, the stock is trading at roughly 0.6x price-to-book while its real estate developer peers with comparable profiles trade at 0.9x. If Ho Bee Land’s multiple converges to 0.8x, the stock would still have an upside of 30%. In the following sections, we have identified a number of factors and events should lead to value realization.
Company Overview
Ho Bee Land Limited is engaged in property development, property investment and investment holding. The Company operates through two segments: Property investment and Property development. The Property investment segment includes investment in properties. The Property development segment is engaged in the development and trading in properties. Its other segments include investing in quoted and unquoted securities and private equity funds. The Company has a portfolio that covers residential, commercial and industrial projects. Its properties include Turquoise; Seascape; Cape Royale; Apollo and Lunar House, London; 39 Victoria Street, London; 110 Park Street, London; 60 St Martin's Lane, London; 1 St Martin's Le Grand, London; Tangjiawan, Zhuhai; Parliament View, London; Nanhu Eco City, Tangshan, and Xujing, Shanghai.
Business Segments
Property Investment
With regards to HBL’s investment properties, 64% of it comprises office building in London and Singapore. Total lettable area of commercial office space in London is 81,836sqm while in Singapore it is 100,396sqm. As shown is a snapshot of HBL’s property investments by sector.
Earlier this year February 2017, HBL divested Rose Court, one of its London office building at S$167.2million, netting a gain of S$7.9million or 40.6% above acquisition price. It eventually acquired a new prime Grade-A office in Central London which would add approximately S$9.3million in annual rental income. This reflects a net yield of about 4.1% based on the acquisition price of S$228million, hence we should see higher overall rental income for H2 2017. Weighted average lease expiry (WALE) of HBL’s London properties > 5 years, with the recently acquired building have a WALE of 10.2 years. This should allow HBL to tide over the Brexit uncertainties in the coming 2-3 years and maintain/improve profitability.
As the lease on Rose Court was expiring in 18 months, where the full impact of Brexit would still be lingering, management’s strategy to divest before the lease expire and re-invest the capital to upgrade its London properties portfolio shows active management by the Company and this should strengthen its recurring income business model over the next few years. Also, according to the management, sales proceed of Rose Court will be used to reduce borrowing and fund working capital expenditures. This will provide additional stability to HBL’s business as well.
Next, we will analyze the conditions of the central London commercial office market where all of HBL’s London portfolio is situated. From above, we see that compared to previous Q1, take-up rate in central London increased slightly by 3% to 3.4m sq ft and currently stands at 10% above the 10-year average of 3.1m sq ft. Furthermore, Q3 2017 also saw a large proportion of take-up by pre-letting deals. This shows that confidence is increasingly being restored in a number of occupiers and the overall market after the Brexit saga and the ensuing office market downturn.
A point to note however is that while prime headline rents have softened since the EU referendum vote, it would be unlikely to just stop here. Prime rents are anticipated to come under further downward pressure over the next 9-12 months as the full impact of UK’s decision to leave the EU becomes clearer. Thus, office rental growth forecasts are still showing uncertainties.
On a brighter note, total return by the office sector is forecasted to show a huge step-up to nearly 4% in 2018 as compared to 2017.
Therefore, given HBL’s portfolio of properties located in the prime spots of central London (which ultimately is one of the world’s most important financial hub) and conditions are expected to improve much faster when the full impact of Brexit is blown over, we can expect HBL to unlock greater value in its remaining properties.
As for The Metropolis in Singapore which has over 100,000sqm of lettable area, it is currently 100% fully-let and is responsible for 90% of the Group’s revenue from Singapore operations. With The Metropolis being the iconic office building in one-north and home to the finest research facilities and business parks, the desirable location would serve as the headquarters for many leading multinational corporations. Also, as The Metropolis remains as one of the few truly quality office building in one-north, it is expected to maintain its competitive advantage and thus should see increasing rents over the coming years.
Property Development
HBL has development properties located in Singapore, China, and Australia. The more notable developments are the three residential building – Turquoise, Seascape, Cape Royale, situated in the exclusive residential enclave of Sentove Cove, Singapore. Due to the property cooling measures introduced in 2013 aimed at combatting the high prices of residential homes, private residential home prices have been falling since then and HBL thus adopted an interim leasing strategy for its residential developments to tide through the downturn in the residential property market.
Flash estimates by the URA Singapore for Q3 2017 however showed that the private residential property index had increased 0.7 point from 136.6 points in 2nd Quarter 2017 to 137.3 points in 3rd Quarter 2017, representing an increase of 0.5% compared with a 0.1% decline in previous quarter. Prices of non-landed private residential properties also increased by 0.2% in Core Central Region (CCR), compared to the 0.5% fall in the previous quarter. Overall, private residential property price index for Q3 2017 showed its first rebound in 16 quarters and this could signal a budding recovery for the private residential market. Thus, for HBL’s upscale luxury development in Sentosa, this should translate to higher rental generation for its interim leasing strategy and eventually an opportunistic sale of the development as market conditions improve.
In addition, collective sales activity has historically been a leading indicator of the residential cycle. Hence from the recovery we see in the graph above, the impending corrective sales wave may well accelerate the price recovery in the near term with immediate incremental demand from displaced sellers, and large capital gains.
As for the supply pipeline for private homes, we observe that it has peaked in the last year 2016, while forecast for coming years show a large tapering. This should further reduce the downward pressure on prices as the supply for private homes get drawn down.
Finally, as of Q2 2017, Singapore’s private home prices have fallen 11.6% since Q3 2013, compared to Hong Kong’s which have risen by 35.8%. This makes private homes in Singapore relatively much more attractive than Hong Kong, and thus should draw more interest from more serious foreign buyers.
Overall, we should be seeing a broadening of the medium term recovery in the Singapore residential market as demand for private homes absorb the existing supply overhang and this would allow HBL to monetize its existing projects at better prices, resulting in higher development profits, as well as free up its portfolio and re-invest into more value-adding properties.
Despite the slowdown in the Singapore residential market, one reason why HBL was able to remain resilient is due to its overseas diversification strategy. The JV residential project in China, Yanlord Western Garden, Shanghai, is about 70% sold which had contributed to the significant rise in share of profits from its associates. As for Zhuhai project, Yanlord Marina Peninsula, to-date a total of 1,610 units have been launched with 95% sold. With about 3,500 units in total for the entire development project to be completed and launched over the next few years, HBL is expected to continue recognizing significant gains as the remaining 1,900 units or 54% of total units are handed-over in phases.
HBL’s venture into the Australian market has also paid off with its residential developments in Gold Coast and Melbourne over 80% and 90% sold respectively. There are still two more plot of lands in Gold Coast with total gross floor area of 80,581 sqm for development, which would add to potential contribution to development earnings in the future.
Financial Performance and Valuation
Currently, HBL’s stock is trading at attractive valuation at approximately 0.6x price-to-book and 7.6x price-to-equity while its peers are trading at 0.9x and 14.1x on average respectively. HBL is also outperforming its peers in terms of operating margin at 77.8% compared to the industry average of 59.4%. HBL’s ability to utilize a lower amount of leverage than its peers at 46% debt-to-equity to generate a similar return on equity further proves its stable business model. Additionally, with the relatively lower amount of debt the company is taking on currently, HBL can effectively enter into more acquisitions to expand its portfolio should the opportunity arise without throwing its company’s debt level off-balance.
As of H2 2017, revenue growth had shown a large drop of 78.4% compared to the same period last year mainly due to the higher sales recognition of two residential development projects in Melbourne and Gold Coast, Australia which were completed in the first half of 2016.
Despite the decrease in revenue, HBL’s bottom-line was boosted by its share of profits from associates and jointly-controlled entities in China which rose 61% from S$7.6million in the corresponding period last year to S$12.2million. HBL’s earnings before interest and taxes (EBIT) registered a 41% increase to S$104million while earnings per share rose by 53% from 9.08 cents to 13.88 cents compared to the same period last year. Further stability and increase in earnings is expected to continue with the newly acquired commercial building in London expected to make significant contribution to rental income, as well as the improving property market conditions which will allow HBL to fetch a higher valuation for its development sales.
Taken from Thomson Reuters, analyst coverage on HBL also shows a median price target of $3.01. This represents a rough 20% upside from its current trading price of $2.51. Total shareholders’ fund as at 30th June 2017 amounted to S$2.96 billion, representing a net asset value of S$4.45 per share. Thus, with HBL trading at a 44% discount to its NAV, it is currently undervalued by the market and should see further price increase going forward as it unlocks greater value of its portfolio properties.
Risks
Economic downturn in both local and overseas market
Downturn in property markets continue
Uncertainties following the Brexit which would lead to companies and investors to stay on the sideline, capping demand for commercial properties
Should turmoil result, further depreciation of the pound would hit earnings
Fresh round of property cooling measures being introduced should prices skyrocket especially in the China and Singapore market
Rising Development Charge (DC) rates in Singapore
As of September 2017, DC rates for non-landed residential use have increased by an average 13.8% compared to March 2017 which would result in lower development earnings for developers
Catalyst
Relaxation of immigration policy (Singapore)
Population growth has slowed to 1.2-1.3% average annual growth between 2014 and 2016. Data released on 27 September showed that as of June 2017, population growth slowed to 0.1% Y-O-Y, as foreign population registered its first decline in 14 years, falling 1.6% Y-O-Y. In the longer term, a population growth slow down coupled with ageing population in Singapore (which would affect its economy over time) could prompt the government to consider relaxing immigration policy
Uncertainty over Brexit and consequently the property market cleared
Acquisitions of new commercial buildings to enhance its recurring income business model
This is not a BUY or SELL call. Personal opinion,please dydd.
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