Sansiri

Sansiri Public Co. Plc (SIRI)

From holiday homes to properties for owner occupiers, SIRI keeps surprising the market with high take-up rates. Again, it raised  its FY12 presale target to THB40bn. Its strong brand equity is no longer just a perception but something that is resulting in tangible growth.We raise FY12 EPS by 7% and fine-tune FY13-14 for a bigger backlog and rising margins. We also up our target price as we roll it over to end-13, using 9.5x CY14 P/E, still 1 s.d. above the mean given its status as the second largest developer with strong brand equity.We reiterate our Outperform call. Near-term catalysts are a new presale high in 4Q12 and lower gearing. New presale target We believe that
SIRI’s strong brand equity is leading to tangible results in the form of outstanding 9M12 presales of THB26.3bn (+49% yoy), 73% of SIRI’s  previous FY12 presale target of THB36bn, the highest in the market. The strong growth was mainly driven by condos (+142% yoy) as SDH/TH
presale fell 8% yoy due to limited new TH launches in 2Q12. For the second time this year, SIRI upgraded its presale target to THB40bn. Highly secure outlook We are positive on SIRI’s revenue and earnings visibility, thanks to the solid backlog. 99% of our FY12 revenue estimate is in the bag, 55% of FY13 is locked in and 19% of FY14 is secure. There is upside to FY12’s gross margin given 1H12’s 33.7% vs.our estimate of 33% and a mean of 30% in FY05-11. Investment in branding will continue to raise barriers to entry but at a lower SG&A ratio, thanks to economies of scale.Gearing concern is easing As the exercise of 17% of its warrants (SIRIW1) in Sep 2012 led to cash inflows, net gearing probably peaked at 1.85x in 2Q12. We expect it to come down to 1.6x (0.74x if warrants fully exercised) by end-12 vs. 2.5x under the debt covenant.
Still a conviction buy SIRI remains one of our top picks.Its valuation is undemanding and yields are attractive. We expect further rerating given the paradigm shift in SIRI’s business model and a strategy that is geared to differentiation rather than low costs. Get in on the ground floor of the rerating
1. OUTLOOK
1.1 New ambitious THB40bn presale target We believe that SIRI’s strong brand equity is leading to tangible results in the form of outstanding
9M12 presales of THB26.3bn (+49% yoy), 73% of SIRI’s previous FY12 presale target of HB36bn, the highest in the market. It will also support sustainable sales growth in the longer term. The strong presale growth was mainly driven by condos (+142% yoy) as SDH/TH presales fell 8% yoy
due to limited new TH launches in 2Q12. For the second time this year, SIRI upgraded its presale target to THB40bn (+84% yoy), which is also the most ambitious target in the sector, followed by PS’s THB29.2bn and LH’s THB22bn. Notably, presale as at 9 Oct 2012 amounted to THB27.2bn or 68% of SIRI’s new target of THB40bn. The remaining THB12.8bn will be supported by B28.6bn worth of projects available for sale and THB2.4bn worth of new launches in 4Q12. Given the exceptional growth of FY12 presales, we expect modest growth of 5% to THB42bn for FY13.
Another positive development in presales is the rising contribution from the upcountry market. As at 9 Oct 2012, presale from upcountry totalled THB8.8bn or 32% of total presales, surpassing SPALI’s 15% upcountry contribution for the first time and an impressive rise from less than 5% contribution in FY11. Not only has SIRI been successful in its dominant holiday home market of Hua Hin (2½ hours’ drive from Bangkok), it is also doing well in the new holiday home
market of Kao Yai. Its first project, which is a 3 hrs’ drive from Bangkok, was sold out in a day.
SIRI has also taken its first step into the owner-occupier housing market in Phuket and Chiang Mai where most of its projects are almost fully sold. SIRI’s rapid penetration into the upcountry market is unprecedented among the listed developers in Thailand. We believe that SIRI’s brand equity and strong base of customers with high purchasing power are behind its stellar performance that has left its competitors far behind.
1.2 Highly secured sale revenue outlook
We are positive on SIRI’s revenue and earnings visibility, thanks to the solid backlog. As at 9 Oct, its backlog was THB43bn, of which THB16.5bn was pending transfer in 2H12, THB18.6bn in FY13, THB7.6bn in FY14 and THB307m in FY15. 99% of our FY12 revenue estimate is in the bag, 55% of FY13 is locked in and 19% of FY14 is secured. Note that upcountry’s contribution ratio will start to show a meaningful 10% in 2012 and should rise to 15-20% in FY13, followed by 20-30% in the longer term.We expect THB5bn sales in 3Q12, down 5.5% qoq but up 7% yoy. The qoq decline is mainly attributable to (1) the delay in the launch of the THB567m prebuilt Via 31 condo project (finished condos ready for transfer) from the beginning of Sep to end-Sep 2012, and (2) some delay in the buying decision for SDH/TH as homebuyers were waiting for the Government Housing Bank (GHB) to extend a soft loan scheme to flood victims. The loan amount is up to THB3m
per eligible homebuyer attached with a 3% fixed interest rate for five years. Given that GHB will not extend the soft loan and there are no cancellations by customers, we expect these homebuyers to look to other commercial banks for mortgages, resulting in a shift of transfer/revenue booking from 3Q12 to 4Q12.Meanwhile, 4Q12 is expected to set a new record after the previous record quarter of 4Q11, helped by the bulk of the condo backlog of THB7.5bn as well as new sales from finished condos (e.g., Via 31, Wyne, Chelona) and the SDH/TH backlog worth THB4bn.
1.3 Fine-tuning EPS estimates
We raise our FY12 EPS forecast by 7% to reflect the secured revenue, stronger service income and improving gross margin. FY13-14 EPS are fine-tuned for the rising revenue visibility backed by a growing backlog but offset slightly by a higher SG&A ratio assumption. There is upside to FY12’s gross margin given 1H12’s 33.7% vs. our estimate of 33% and a mean of 30% in FY05-11. Investment in branding is expected to continue. We believe that consistent brandbuilding efforts should result in higher entry barriers for SIRI’s dominant market (especially the premium market for both condo and SDH/TH and the holiday home market upcountry) and increased customer loyalty. Nonetheless, we expect the SG&A to operating revenue ratio to trend down from 18.3% in
FY12 to 17.6% in FY13 and 17.0% in FY14, which is slightly above AP’s SG&A ratio of 16-17% but better than QH’s 18-20% ratio. SIRI’s expanding economies of scale should give it more bargaining power over contractors and suppliers, allowing for better control of construction cost and marketing expenses.We now project an average FD EPS growth of 23-24% in FY13-14 after subdued growth of 4.7% in FY12, assuming its warrants are entirely exercised on 1 Mar 2012.
1.4 Easing gearing concern
As 17% or 513m of its 2,947m warrants (SIRIW1) have been exercised YTD, SIRI received THB667m cash, of which THB642m came during Sep 2012 when 494m units were exercised (conversion ratio: 1:1.167; exercise price: THB1.114). Given the proceeds from the warrant exercise, gearing probably peaked at 2.1x in 2Q12 while net gearing also probably peaked at 1.85x. We expect gearing to come down to 1.8x and net gearing to fall to 1.6x by end-12 (non-fully diluted basis) vs. 2.5x under SIRI’s debt covenant. Assuming all the SIRIW1 warrants were exercised from Day 1, gearing would be 1.21x and net gearing would be 0.74x (adjusted for interest savings from warrant exercise) for FY12.
1.5 Potential candidate for SET 50
SIRI’s market capitalisation has almost tripled from THB8.9bn at the start of 2012 to THB24.6bn now and its average daily turnover has even surpassed a large-cap stock like LH. SIRI’s most comparable peer is AP due to similarities in market positioning, product mix, premium brand perception and gearing. SIRI’s market capitalisation is moving closer to AP’s THB25.0bn and has already surpassed QH’s THB18.9bn. We see SIRI’s potential inclusion in the SET 50 as another catalyst for rerating as it would put SIRI on the radar screens of more investors. Its relatively high dividend yield is another magnet for investors.
2. VALUATION AND RECOMMENDATION
2.1 Reiterate Outperform with higher target price We raise our target price as we roll it a year forward to end-13, using 9.5x CY14 FD P/E (previously 7.5x CY13 P/E), still 1 s.d. above the mean given its status as Thailand’s second largest developer with strong brand equity.We believe that SIRI deserves a two-notch rerating given its 1) outstanding presale performance and on-track turnaround which is showing expanding revenues and improving margins, 2) strong brand equity which will provide solid support for its successful market expansion from high to lower end, from condos to SDH/TH and from Bangkok to upcountry, and 3) potential inclusion in the SET 50. SIRI remains one of our top picks. Its valuation is undemanding and yields are attractive (Figure 23).
We expect further rerating given the paradigm shift in SIRI’s business model and a strategy that is geared to differentiation rather than low costs. We reiterate our Outperform rating. Near-term catalysts are SIRI’s quarterly new presale and net profit highs in 4Q12 and improving gearing.