Land & Houses

Land & Houses Plc (LH)

Investment thesis: We still prefer LH for its asset monetization plan (sales of rental assets to a property fund), which will boost bottom-line growth ahead of peers in 1H12. We maintain our BUY rating with a YE12 target price of Bt6.60, based on a sum-of-its-parts valuation—a housing PER of 17.3x (LH’s FY05-10 mean) and Bt2.52/share of investment value. Over the medium-term, there is potential for a gain from divesting QCON (21% stake). LH trades at 7% discount to its mean FY05-10 PER, but the discount would be much deeper with our estimated gain (Bt1bn) from asset sales included (about 1SD below its mean). 
Earnings revision: We have cut both our FY11 and FY12 net profit forecasts by 10% to factor in diminished expectations for low-rise sales, due to the flooding (our housing revenue assumptions drop by 7% for FY11 and 11% for FY12). Presales of Bt7bn at end-Sept (Bt5bn condos, Bt2bn low-rise) fully secure our FY11 revenue forecast and represent 16% of FY12. Under our adjusted model, FY12 core profit growth still looks good at 15%.
Larger condo revenue contribution in 4Q11 onward: Management guesstimates flat YoY low-rise revenue in FY12, as demand will recover only gradually following the 4Q11 flooding. However, LH is confident that it will transfer Bt2bn in units from three condo projects in 4Q11 (53% of our 4Q11 revenue forecast). In FY12, we expect strong condo revenue growth of 30% YoY to Bt3.3bn (90% secured by presales). The condo revenue contribution will increase from 16% in FY11 to 20% in FY12, according to our model (see Figure 2).
Asset divestments in 1H12: The CFO guided for asset sales to a property fund in 1H12 (serviced apartments and rental SDHs). We anticipate the fund size at Bt5-5.4bn (implying about a 7.5% yield). The key benefit of the asset monetization is a Bt1bn gain (our estimate) from asset sales (Bt0.10 per share), assuming no LH stake in the property fund (Figure 4), which implies 27% upside to our FY12 bottom-line. The sale will also mean a lower net gearing ratio at YE12 of 0.7x (currently 0.8x). Furthermore, it would push down the FY12 PER (net EPS) to 12.7x from 16.1x in the absence of the sale. Rents from serviced apartments and retail space in Terminal 21 (which opened in Oct 2011) will mitigate the effect of the revenue foregone as a result of the asset sales.