Here’s 1 Cheap Real Estate Company That May Run into Financial Trouble

Shares which are selling for less than their book value (total assets minus total liabilities) are often thought of as bargains. That’s especially so for companies whose main business lies in the ownership of real estate.

On that basis, Ho Bee Land Ltd (SGX: H13), a real estate developer which has steadily morphed into a bona-fide investment property owner over the years, can be thought of to be cheap. At its current share price of S$2.26, the company’s valued at just 0.58 times its book value.

But despite its bargain price, investors might want to step in with caution – there might be some storm clouds forming ahead for the company.

A change in focus

While a large part of Ho Bee Land’s business had traditionally been about developing residential real estate, the firm stopped bidding for residential land sites in Singapore since 2009 after it felt that prices weren’t right.

As a result, the company’s revenue from the sale of developed properties had dwindled steadily since then, reaching zero in 2014.

Year Property development revenue
2009 S$1.13 billion
2010 S$568 million
2011 S$316 million
2012 S$451 million
2013 S$114 million
2014 $0

Source: S&P Capital IQ

This situation likely wouldn’t last. In an interview with The Business Times, Ho Bee’s chairman and chief executive Chua Thian Poh mentioned that the firm hopes “to build a 50-50 balance between investment and development income.”

The problem though, is whether the firm would actually be able to see the transition.

Danger underneath

Credit has to be given to Ho Bee Land for its discipline in refusing to bid for land at prices that it thinks wouldn’t make for good business.

The firm has also improved the health of its balance sheet a fair bit over the years, seeing as how its total debt to equity ratio had declined from 129% in 2008 to just 36% in 2014.

But, despite the firm’s operational discipline and low leverage ratios, its foray into being a property owner – the company now owns commercial real estate in Singapore and London which collectively accounted for 62% of its total assets as of end-2014 – has actually brought with it heightened financial risks.

This is exemplified by the rising borrowings and dwindling cash position that the firm has experienced since 2009:

Ho Bee Land's total cash and total borrowings

Source: S&P Capital IQ

Ho Bee Land’s current small cash position of just S$10 million (as of end-2014) on its balance sheet is particularly problematic given that the firm has some S$163.6 million in borrowings that are due by 31 December 2015.

The company would have a strong stream of recurring rental income coming in from its investment properties in 2015. In addition, it also has some S$149.7 million worth of properties that are held for sale which can theoretically be converted into cash by 31 December 2015 and be used to help repay those borrowings.

But, the point here is that the company has very little room for error. If Ho Bee Land can’t refinance the S$163.6 million worth of borrowings during the year and faces any issues with rental collection or the sale of its for-sale properties, it might just have to hold some really difficult talks with its lenders.

A Fool’s take

Ho Bee Land does look cheap at its current price, but that does not mean it would necessarily be a good investment going forward. Investors have to be aware of the risks involved, with an important one being the company’s potential for a run-in with financial trouble during the year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.