Excluding fair value gains, net profit dipped 32%

Synopsis: Reiterate our BUY recommendation based on fundamental valuation. RNAV per share of S$1.71 is based on no further sales scenario.

Results Review
2Q08 net profit dipped 70%. Ho Bee reported 2Q08 results with net profit decline of 70.4% to S$37.0m on the back of a 27.0% drop in revenue to S$116.8m, compared to the previous corresponding quarter. The sharp decline in bottomline was mainly due to the presence of a S$71.0m fair value gain of investment properties in 2Q07, which boosted 2Q07 profits. Excluding the fair value gain, net profit declined by about 32%. Further contributing to the decline in revenue and net profits was lower revenue recognition of property development projects. In 2Q08, the main project which contributed to the bottomline was Turquoise, which is about 48% sold.

The revenue of other property development projects which were progressively recognized in 2Q08 included Montview (TOP: March 2008), Orange Grove Residences, Paradise Island, The Coast, Quinterra and Vertis.

In contrast, revenue from property investment rose 42% to S$4.2m in 2Q08, over 2Q07. This growth was largely due to relatively strong occupancy and rental rates of office units at Samsung Hub, which was acquired in early 2007, and industrial buildings at HB center II and One Tannery Road.

Notwithstanding the global economic slowdown and rising travel costs as a result of escalating fuel prices and exchange rates, Ho Bee’s hotel operations registered a 40% increase in room and café revenue to S$2.2m, over 2Q07.

We have lowered our FY08 forecast in view of delays in the completion of Quinterra and Vertis from 4Q08 to 1Q09 as well as slower profit recognition of development projects which offers Deferred Payment Scheme (DPS).

Investment Highlights
Gearing is expected to improve substantially to 0.14x by end FY09 with the completion of five development projects. Net gearing remained similar to that of 1Q08, at about 1.2x as at 30 June 2008 and this was the result of the commencement of construction work on several development projects and the acquisition of land parcels over the first half of 2007. However, as most of Ho Bee’s projects are either close to 100% or fully pre-sold prior to the commencement of construction, the collection of progress payments as construction work progresses will enable Ho Bee to repay off debt, and accordingly reduce gearing.

More importantly, there are five projects, namely, Paradise Island, The Coast, Vertis, Quinterra and Orange Grove Residences, eligible under the DPS, which are due to receive TOP status over FY09. As there is a large percentage (of between 40% to 70%, depending on projects) of total sales which are sold under the DPS for these projects, the lump sum collection of sales proceeds upon TOP is expected to improve gearing substantially to 0.14x (FY09F), based on the Group’s current portfolio of land bank.

Valuation & Recommendation
With the expected TOP status of five projects in 2009, earnings are expected to surge in FY09. Based on our conservative scenario assuming no further sales on Ho Bee’s project (taking into account 48% take-up rate of Dakota Crescent), we arrived at RNAV per share of S$1.71 (previously S$1.73), backed by confirmed sales. Further, the financial health of the company is strong, relative to the other mid-cap developers. We reiterate our BUY recommendation.