Record High Profits Levels

SYNOPSIS: Adjusting for weak confidence associated with the residential property sector, we apply a 30% discount to valuation to arrive at target price of $2.10, down from $2.75 previously. Assuming no further sales scenario, valuation is $1.75, backed by confirmed sales. Reiterate BUY

RESULTS REVIEW
Core FY07 profits surged 91.6%. Ho Bee reported FY07 results with net profit growth of 176% to $272.2m on the back of revenue growth of 51.7% to $596.1m. The result was largely in line with our net earning expectations. The surge in bottomline was in tandem with the rise in revenue as well as $83.3m gain in fair value of investment properties. Excluding the fair value gain, net profit in FY07 increased 91.6% to $188.9m over FY06.

The strong bottomline performance was the result of a 51% increase in revenue from property development, which accounted for about 96% of Group revenue and contributions came predominantly from the progressive recognition of residential projects at Sentosa Cove, namely Coral Island (received TOP in Aug 2007), The Coast and Paradise Island. There were also contributions from Orange Grove Residences at Orange Grove Road, Montview at Mount Sinai, Quinterra at Holland Road. Most of these projects are fully sold, with the exception of Orange Grove Residences (92% sold) and Paradise Island (96% sold). The Group’s investment properties also contributed to FY07 bottomline growth. The higher revenue was largely due to rental income derived from Samsung Hub office space at Church Street, which was acquired in early 2007 as well as higher occupancy levels and improved rental rates for both renewals and new tenancies.

WILL LAUNCH DAKOTA CRESCENT SITE; DELAY OTHER LAUNCHES
The US subprime crisis has dampened market sentiment and confidence in the Singapore residential property market, resulting in weaker property sales over the past six months. In view of the market sentiment, Ho Bee (as well as most developers) will delay property launches of its highend and mid-range projects until the second half of 2008 or early 2009. The delayed launches include projects at the Orange Grove condo site, Holland Hill Mansion site, Elimira Heights site and Seaview Collecton at Sentosa Cove. The launch of its condominium at Dakota Crescent will resume in 1H2008 as planned. In view of the relatively lower average selling price (ASP), expected at $1,050psf, the project is expected to appeal to the massand/or mid-tier market homebuyers, where pent-up demand still prevails.

CLINCHED THE LAST CONDOMINIUM SITE AT SENTOSA COVE
Ho Bee continued to amass land bank at Sentosa Cove. In Jan 2008, the Group successfully bid for its eighth and the last condominium plot available at Sentosa Cove, called the Pinnacle Collection, together with IOI Land. Assuming an ASP of about $3,200psf, this project, which is scheduled for launch in the first half of 2009, is expected to contribute about $0.27 to Group RNAV per share.

HIGH GEARING WILL BE TEMPORARY
Ho Bee’s gearing escalated to 1.11x as at 31 Dec 2007, from 0.44x as at 31 Dec 2006 as a result of the commencement of construction work on several development projects and the acquisition of land parcels over the first half of 2007. The recent acquisition of Pinnacle Collection is expected to increase gearing further as financing for the site has not been secured. However, with most of Ho Bee’s projects either close to 100% or fully presold 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. Moreover, several projects, in particular, Montview (expected TOP : 1Q08), Vertis (expected TOP : 4Q08) and Quinterra (expected TOP : 4Q08), are expected to be completed over 2008. Accordingly, we expect gearing to improve to about 0.9x by the end of 2008, based on the current portfolio of landbank.

VALUATION & RECOMMENDATION
Including the recent acquisition of Pinnacle Collection, Ho Bee is now valued at RNAV per share of $2.97. Adjusting for the weak sentiment associated with the residential property sector as well as lower liquidity for a mid-cap company, we apply a 30% discount to valuation to arrive at our target price of $2.10 (down from target price of $2.75 previously).

Ho Bee’s share price has fallen by about 67% from the peak in June 2007 and about 41% year-to-date. At $0.855, valuation is very attractive. In our scenario study where we conservatively assumed no further sales from Ho Bee’s projects, we arrived at RNAV per share of $1.75 backed by confirmed sales. We reiterate our BUY recommendation.

[This article is contributed by NRA Capital Pte. Ltd., a licensed Financial Adviser by the MAS. Readers of this content are bound by the same terms & conditions of our website www.netresearch-asia.com .]