Ho Bee Investment (KimEng)

Event

Ho Bee reported a net profit of $57.2m for 2Q11, down 55% from the previous year but in line with our expectation. Earnings in the second quarter came from an improved sale of The Orange Grove and maiden contributions from the redevelopment of One Pemimpin Drive, which collectively accounted for more than 60% of net profit. We remain hopeful that the pace of sales in the coveted residential enclave of Sentosa Cove will improve in the near term. Reiterate BUY.

Our View

The Orange Grove saw 12 units sold over 2Q11 with an average price of $2,370 psf, above our assumption of $2,200 psf. The redevelopment of One Pemimpin Drive is 76% sold and has achieved an ASP of $800 psf. Seascape also saw improved sales with the launch of the remaining units after the project received its TOP in February 2011. We estimate there remains about $580m ($0.80 per share) of sales to be progressively recognised, and we value Ho Bee’s remaining landbank in Singapore at $1.33b ($1.83 per share), of which 85% is on Sentosa Cove.

The final stages of Circle Line will begin operation on 8 October 2011. Among the estates that will benefit from the greater connectivity and shortened travel times is research hub one-north. We are therefore optimistic that the rental demand for the well-located The Metropolis, Ho Bee’s office development at one-north, will be strong. According to our estimates, the project could spawn a revaluation gain of $400m ($0.55 per share) upon completion in 2013. We have yet to factor this into our valuation.

We believe Ho Bee will participate in the tender for the second commercial site at Paya Lebar, having lost the first to a more aggressive rival in April 2011. The site has a GFA of 935,585 sq ft and has minimum allocations of 40% and 15% for office and hotel use, respectively. The tender will close on 18 October 2011. Using the winning bid for the first commercial site as a gauge, the second site is likely to receive bids of over $800m, which is well within what Ho Bee’s balance sheet can take.

Action & Recommendation

We reiterate our BUY recommendation and target price of $1.93, pegged at a 30% discount to its RNAV of $2.76 per share. The stock also trades below its book value per share of $2.13.