Hemaraj Land & Development

Hemaraj Land & Development Plc (HEMRAJ)
Investment thesis
The information HEMRAJ presented at its analyst meeting makes us even more bullish over its land sales growth outlook, even if technical problems at Gheco-One have dented the profit expansion profile somewhat. We have upgraded our FY13-14 earnings forecasts only slightly, but there is scope for upside to our current FY13 model from the establishment of a property fund in 4Q13. Our BUY rating stands with an SOTP-based YE13 target price of Bt4.5, which translates into a PER of 14x.
Land presales target upgrade underway
1H13 land bookings totaled 1,190 rai, equal to 66% of HEMRAJ’s current FY13 target of 1,800 rai. Management guides for a presales target upgrade next week. Our expectation for FY13 presales has now expanded to 2,200 rai. With regard to realized sales, the firm said it transferred 628 rai during the quarter (we had assumed 480 rai) and more transactions will be recognized in 3Q13.
Technical problems at Gheco-One squeeze profit growth profile
After an eight-week outage during 2Q13, the plant went down again on Monday because of a problem with its heating system; it is expected to resume operating on Friday. We have downsized estimate of equity income from the asset by Bt89m from our previous assumption of Bt360m. If the heating system cannot be fixed easily, Gheco-One will have to run at 75% capacity for another 45 days, in which case we would cut our Gheco-One equity income estimate by another Bt79m. 
2Q13 earnings to jump YoY but drop QoQ
We expect a 2Q13 profit of Bt520m, up 473% YoY but down 15% QoQ. The top-line should have risen by 55% YoY and 15% QoQ on greater land transference (up by 71% YoY and 21%QoQ), rising utilities income (up by 22% YoY and 2% QoQ) and rental income (up by 59% YoY and 7% QoQ). GM should have fattened, both YoY and QoQ, as customers have largely moved into locations with existing utilities infrastructure. There would have been an equity loss of about Bt100m from Gheco-One tied to its seven-week outage and an FX loss. Despite Gheo-One’s travails, we expect 2H13 earnings to rise HoH, driven by utilities fees, rental income and a longer operating period for Gheco-One.
Scope for profit forecast upgrade from property fund
Our FY13-14 earnings forecasts inch up by 2% and 1%, respectively, as profits tied to our upgraded land sales assumptions more than offset the effect of diminished expectations for equity income from Gheco-One. There is also scope for upside from a proposed property fund in 4Q13. HEMRAJ plan to sell 150k sq.m of factory space to the fund. We estimate a one-time gain of Bt500-600m to be booked to the income statement.