Brokers' take: DBS initiates Ho Bee with 'buy', S$3.80 TP on stable income, strong portfolio

DBS Group Research on Thursday initiated coverage on Ho Bee Land with a "buy" call and a target price of S$3.80, citing its stable income and dividends, and a diversified, "future-ready" portfolio.

Shares of H13 were trading at S$2.89, down S$0.06 or 2.3 per cent, as at the midday break on Friday. That implies potential upside of 31.5 per cent.

In their Thursday report, DBS analysts Dale Lai and Derek Tan said the real estate development and investment company also has opportunities to unlock value for shareholders through several corporate actions.

Ho Bee's stable income has allowed it to pay "Reit-like" dividends, they said, noting that recurring rental income has grown as a portion of its revenues over the past five years. In FY2020, rental income made up as much as 99.7 per cent of revenues and should remain above 90 per cent in the foreseeable future, they said.

They also believe Ho Bee is trading at a discount to competitors despite outpacing them in terms of net asset value growth and dividend yield.

"We believe the market has largely ignored (Ho Bee)'s superior shareholder metrics compared to its closest developer peer, UOL," they said. "Its peers whose revenues are heavily dependent on development projects may see their dividends fluctuate in tandem with project launches and sales."

The analysts also noted that Ho Bee's office properties in London's central business district and Singapore's de-centralised science and knowledge hub are well-positioned for the new economy. The group's property investment portfolio is valued at more than S$4.6 billion.

Ho Bee owns The Metropolis in Singapore, a commercial property in One-North that the analysts believe can attract tenants from key growth sectors such as the biomedical sciences, infocomm and media, and startups.

Its location also aligns with a pivot towards suburban areas as companies adopt flexible working arrangements.

In London, Ho Bee has seven prime office properties with near-full occupancy rates and strong earnings visibility. Although companies are rethinking the use of office space in the "future of work", which will put pressure on these properties, the analysts believe such risks will be manageable.

"Even as companies look to rationalise their workplace footprint, Ho Bee's properties will benefit from the flight to quality as businesses will always want to maintain a presence in the financial hub of the UK," they said.

Meanwhile, Ho Bee's residential projects will continue to play a key role in earnings given the company has close to S$1.3 billion worth of development projects on the books.

Riding on the positive sentiment in Singapore's property sector, it has leased unsold units of its Sentosa Island developmental projects. It has also "substantially sold" its China projects and is venturing into the primary sales market in Australia.

Finally, DBS believes low interest rates and ample liquidity make Ho Bee a possible take-over target.

In the event of a privatisation, a securitisation exercise, or a conversion of the listed entity into a staple security, DBS sees potential upside of 35 to 60 per cent. Shares of Ho Bee closed at S$2.85 on Friday, down 3.39 per cent.