Hemaraj Land & Development

Hemaraj Land & Development Plc (HEMRAJ)

Investment thesis
HEMRAJ presented an impressive long-term growth outlook at its analyst meeting yesterday. The rental and power businesses will drive and sustain earnings growth (a 3-year CAGR of 14%). The stock currently trades at an FY13 PER of 12x, equal to its long-term average and lower than the peer mean of 14x. We believe that HEMRAJ’s fundamental shift to a recurring income business model and its rising GM profile will prompt a further re-rating. Our BUY rating stands with a YE13 target price of Bt4.1, based on a SOTP valuation. Our target implies an FY13 PER of 14x and PEG of 0.6x.
Earnings growth in FY13, despite lower land sales
HEMRAJ’s FY13 land sale target is 1,600 rai, lower than last year’s land sales of 2,317 rai. Management said demand for land remains strong, led by second- and third-tier auto-parts makers. Land sales prices are likely to rise by 5-10% this year. Despite the lower land sales target, the FY13 bottom-line outlook is strong, supported by the utilities businesses and equity income from the Gheco-One power station. HEMRAJ is transitioning to a rental-plus-utilities revenue model from a land sales-driven model—the rental business generates good GM of about 72%.
Swift rental business expansion
Management targets enlarging its rental portfolio by 220K sq.m in FY13, which implies a 55% jump in rental property revenue. For the leased factory portfolio, the firm expects occupied space to expand by 120K sq.m from 235,824sq.m at YE12 (up 51%). With regard to the rental warehouse portfolio, HEMRAJ guides that it has four compounds located near Laem Chabang deep sea port under development, which will eventually have a total area of 380K sq.m; about 48% of the area will be available for rent by June 2013. Management says occupied warehouse space will expand by 100K sqm from 16,820sq.m at YE12.
4Q12 preview—earnings to post both YoY and QoQ growth
We expect a 4Q12 profit of Bt731m, up by 16% QoQ and 90% YoY. The YoY jump is because of equity income from Gheco-One (COD July 26, 2012; HEMRAJ’s stake is 35%). Revenue from land sales should post a 16% QoQ rise to Bt1bn. We expect flat water income—the effect of greater potable & clarified water sales is likely to have been offset by lower waste water and raw water receipts. Revenue from rental properties should report a YoY and QoQ increase on an expanded rental portfolio. So, we estimate a top-line of Bt1.7bn, up by 11% YoY and 18% QoQ.
We assume GM of 42%, flat YoY and slimmer QoQ, as there would have been fewer fat-margin residential sales in the revenue mix. Equity income from Gheco-One should have increased 9% QoQ to about Bt300m on a full operational quarter for the Gheco-One power station.