What a month it has been. Volatility in the market has provided me with significant opportunities to add into the market into some of the great companies I’ve always wanted to own. This week, I accumulated a position in Ho Bee Land for another 5,000 shares at a price of $1.95. This is on top of the earlier position previously being added last month.
This is a company that has absolutely top grade assets in cities that are booming in real estate. Other than the development properties they owned in the Sentosa island, they have also recently ventured into the UK building up their investment properties portfolio that has now ballooned to over $2.6 billion.
Earnings
As previously mentioned, in view of the poor market sentiments of their development properties in Singapore, Ho Bee Land has in recent times shifted their strategies into building a solid recurring income from its investment properties. The move started off with the purchase of strategic investment in Metropolis at Buona Vista before further venturing into the other investment properties in the UK, a location familiar to Mr. Chua. Given how the UK pans out differently from the other Euro countries in the region, the UK pound has actually gained momentum and strength which could play in their favor. Time will tell if the investment he made can be as astute as what he did with the Sentosa early in those days.
For the development properties in Sentosa they owned in their books, they will not be subject to the penalty unlike developers who had to clear their inventories within 2 years upon TOP. As market sentiments are currently poor, the company have instead turned these developments into recurring income which will continue to contribute to their bottomline while waiting out for the cycle. The company is also unlikely to take an impairment to their development properties in Sentosa because the management has guided that it is still way above their costs.
Trailing Earnings per share (EPS) from the last year investment properties portfolio stands at 7 cents/share for the full year, and with the other few recent acquisitions made in relation to at least 4 properties in the UK, the forecasted forward EPS coming in from the invesment properties alone is expected to increase to 10 cents/year.
Since this is not a reit in play, investors should not expect significant payout from the earnings. Last year, the company issued a 5 cents/share dividends to the shareholders and I am expecting this year to be a step better at around 7 cents/share. Do note that this is dividends paid out of their cashflow and they have no income support trick used by most reits.
Next year is a big year for them. The company have development properties that will go TOP in countries such as China and Australia, and they will recognize profits which will be booked. Profit margins based on past projects indication are at a high 60%, so we can expect the same contribution this time round.
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| Recent UK Acquisitions |
Balance Sheet
The company has aggressively leveraged to increase their recurring income strategies by buying many investment properties recently. Their gearing, after their last round of acquisitions stands at 0.56, though interest coverage shows that they can easily cover their interest expense for this.
Their cash equivalent in the books remain low so I actually foresee the management to stretch their strategies by recycling capital to an SPC which is an vehicle arm for setting up a Reit. This has never been mentioned from the management itself but I’ll be surprised if this is not in their agenda.
The current book value is at $3.90 while the RNAV is at $3.83.
Comparison with Other Developers in Play
Amongst all the property developers under my radar, Bukit Sembawang and Wing Tai have the strongest balance sheet with a net gearing of 0 and 0.10x respectively.
Wingtai offers a compelling play on its discount to their RNAV though earnings are going to be very weak and slow in the upcoming few quarters.
OUE is another developer that offers a compelling exposure into their commercial and hospitality industries by having two vehicle arms in OUEHT and OUE Commercial that they can easily recycle their capital to. They are also the developer that offers the best play for special dividends, especially with the recent ORP assets being injected into OUE Comm.
Final Thoughts
Projecting a 7 cents/share dividends, I am looking this a 3.5% yield return as dividends with a terminal growth of 2% to its NAV every year. The yield may look unenticing to many yield investors out there but this beats many Reits with over valued proposition out there. I am not biased in this statement because I happened to own both CCT and OUE Commercial to know what I am saying and comparing.
This remains a slow ride for those who believes in the astuteness of Mr. Chua in repeating what his feats once again.
Hello
Are you buying this for dividend or because of hidden assets?
Thank you
Hi Anonymous
It's more to do with the undervalued proposition of assets they are currently holding. Its a good quality assets and good business for the long term.
Beautiful architecture, 60% margin is pretty awesome. I've learned in school that for most businesses, the margin needs to be 35% to stay profitable, I didn't understand at the time, wouldn't anything above the break-even line is sustainable? After I start running the business on my own, I realize even when I gain all the equipment, and a little bit above the break even point, if I didn't get 35%, there wasn't much motivation. Great job picking a solid companies.
Hi Vivianne
The margin is indeed great there. If we can get those sort of margin for our own business, we'll be running around as head of the herd 😉
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