Hemaraj Land & Development

Hemaraj Land & Development Plc (HEMRAJ)

Investment thesis
We remain optimistic about HEMRAJ's FY14 earnings outlook. Although ongoing political unrest may squeeze 1H14 presales, we believe that downside risk to the bottom-line is mitigated by rental and power income and the fact that 80% of the presales backlog is scheduled to transfer this year. Besides, the forecast generous dividend yield (boosted by huge gains on asset spin-offs) will support the share price—we expect an FY13 DPS of Bt0.22, which translates into a 7.5% yield (the DPS is to be announced later this month). In order to factor in a lower equity income assumption (chiefly Gheco-One), we have trimmed our target price to Bt4.0 from Bt4.6.   
4Q13 revisited; huge gain prompts FY13 earnings upgrade …
We expect a huge one-off gain from asset spin-offs of about Bt1.3bn to make for a record 4Q13 net profit of Bt2,241m (we previously forecast a Bt939m profit), up by 226% YoY and 259% QoQ. Excluding the one-off gain, core earnings should still post growth of 39% YoY and 41% QoQ to Bt881bn on revenue expansion from land sales and the rental business. HEMRAJ transferred 770 rai during the quarter against 440 rai in 3Q13 and 448 rai in 4Q12. GM was probably squeezed somewhat, both YoY and QoQ, as price discounts are typically offered on big-ticket land transfers.
There would also have been equity income of about Bt240m from the Gheco-One coal-fired power station.
…but asset spin-offs mean a lower forward revenue outlook
We forecast rental income of Bt810m in FY14, down from Bt1.1bn if HEMRAJ hadn’t spun off assets to a property fund. That translates into a 3% lower bottom-line. Furthermore, the impact of baht depreciation on US dollar-denominated debt (which financed Gheco-One), a lower Japanese benchmark coal price (which is used to calculate Gheco-One’s income under its PPA with EGAT) will squeeze HEMRAJ’s equity income from 1,400/year to 1,200/year.
FY14 forecast cut slightly—but moderate growth profile intact 
We have trimmed our FY14 earnings forecast by 6% to Bt3.1bn to factor in lower assumptions for rental income (asset spin-offs) and equity income from Gheco-One (reduced coal price in calculation of electricity tariff). Despite our cut, we expect HEMRAJ to post FY14 core earnings growth of 6% against a peer average core profit fall of 6% (Bloomberg consensus). HEMRAJ’s FY14 presales target of 1,600 rai (our assumption is 1,500 rai) is not too ambitious, in our view, as its customers are mostly third-tier automotive suppliers with small project sizes, so most of their tax holidays shouldn’t need the approved of the BOI committee (the committee is currently short of a quorum).