Ho Bee announced their first quarter results recently for FY16, so I thought of covering a few thoughts here.
The company reported a 19.9% increase in the rental income year on year from $31m to $37m due to contributions from the 3 new acquisitions in London in the 2nd half of 2015 - mainly 39 Victoria Street, 110 Park Street and Apollo / Lunar House at Croydon. With exception to 110 Park Street which are currently let out at an occupancy of 82% due to some upgrading works, the rest are all operationally fully occupied.
These properties are currently yielding a cap rate of around 4.5% and 5.35% respectively but with debt this looks much higher. These rents are also expected to be highly reversionary once they entered the re-negotiate agreement spectrum.
When I bought the shares of the company, one of the main lookout is on these rental income because these are recurring in nature and cashflow positive to the company (I'll explain why the rest are not later below) so this forms the expectation base to which how much dividends I should be expecting from the company. I don't know if people look at cashflow anymore these days for developers. They seem to be more fixated on the traditional method of discount to book value.
The company managed to book a seemingly impressive 59.7% net profit year on year to round up the first quarter but do note that most of these gains are not cashflow positive. I don't know if anyone notices this point anymore these days.
Take the loss on foreign exchange for instance, these are mostly due to the weakening of the Pounds sterling and RMB Yuan, which has a reporting impact on Hobee's performance since they were done in SGD. If you notice the portion on "Other Comprehensive Income", you will also notice how much currency translation losses the company is suffering from as compared to last year. These will not have a bearing on the cashflow but will impact the book value of the company. If you are buying hoping that the book value of the company will increase, you will be disappointed to know that it has dropped this quarter.
The other point which stands out from the results is the good performance from the associates. The company reported a $9.3m share of profits from associate. These was contributed by the the joint venture project they did in Xujing, Shanghai which will be completed by 2016. So far, 50% of the total 1,470 units have been sold and recognized on the book. Ho Bee owned 40% interest of this JV project so we can expect approximately another $9m upon completion assuming fully sold.
Do note that these share of profits from associates are also not cashflow positive for the company for now due to the application of the equity method reporting requirement based on IAS 28, unless they chose to divest their interest in these JV one day. Under the equity method, an initial recognition on the investment in an associate or a joint venture is recognized at cost, and the carrying amount is increased or decreased to recognize the investor's share of the profit or loss of the investee. In other words, these will go directly to increase the book value of the company instead of being cashflow positive in nature. Again, these doesn't mean much but if you are someone who wants to scrutinize on their cashflow this will be something you need to note.
The company will have some further developments from their Tangshan and Zhuhai project as well as completion of their Australian project - Rhapsody in Gold Coast and Pearl in Melbourne, but also do note that this will be how they will be similarly recognized in the book.
|JV @ Xujing, Shanghai|
My longer term outlook for dividends of 10 cents/share from the rental income still remain a possibility for now, though it is looking unlikely for this year given how much they need to fork out cash for working capital and completion of development costs. As such, I am expecting the company to keep their dividends at 7 cents/share for FY16, with a possibility of a much higher on in the later stages where working capital are more relaxed.
*Vested with 22,000 shares of Ho Bee as of writing.