Ho Bee recently announced the acquisition of two London office properties for £190m at a net yield of 4.1-4.5%, in line with the firm’s strategy of building higher recurring rental income.
We like the move as
1) there is mid-term upside potential as we estimate the passing rent to be 20-30% below market,
2) it is earnings accretive, and
3) offers a good buffer for earnings before overseas project completion and contribution begins from FY16 onwards.
We raise our FY15-17 EPS forecasts by 2-6% with a slightly higher RNAV-based target price (30% discount) as we factor in the acquisition. Maintain Add. Potential catalysts are earnings delivery in FY16 from overseas projects or further accretive acquisitions.
Ho Bee recently announced the acquisition of two London office properties:
1) 39 Victoria Street, a 10-storey office building totalling 98,000 sq ft, for £144m (net yield of 4.1%. The building is single tenanted, by The Corporate Officer of The House of Commons at an rent of £61.30 psf pa, with lease review every five years.),
2) 110 Park Street, Mayfair, a 5-storey building totalling 28,000 sq ft, for £45.8m (net yield of 4.5%). The building is multi-tenanted at an average rent of £77.77 psf pa.
Both acquisitions are expected to be completed around Aug-Sep 2015 and will be financed by internal funds and £ bank borrowings.
What We Think
Strategic move to build rental income with mid-term upside. These moves are in line with management’s long-term strategy of building up recurring rental income given the weakness in local residential markets. In addition, management remains positive on the London office properties and both properties remain under-rented with mid-term upside potential. Financially a positive. We expect the acquisitions to be earnings accretive, adding 1.6-6.0% to FY15-17 core EPS. Gearing post the acquisition appears healthy at 0.53x, albeit slightly higher than Singapore developers’ average of 0.37x. We estimate that Ho Bee’s London office properties post the transactions are worth ~S$1.1bn and make up 28% of its GAV.
What You Should Do
Buy Ho Bee for its deep discount of 47% vs. peer average of 37%, and stable office portfolio (~70% of GAV). The recurring income offers a good buffer for earnings before overseas project completion and contribution comes in from FY16 onwards. Potential catalysts are earnings delivery in FY16 from overseas projects or further accretive acquisitions. (Read Report)
Source : CIMB Research