Land and Houses

Land and Houses Plc (LH)

Company profile

Land and Houses Plc (LH) is the largest market captialtion of is one of the biggest housing developers in Thailand. LH leads the best market share in Single Detached House (SDH). LH pioneered the pre-built model in this country. Although most of its developments have been in greater Bangkok and vicinity, the firm has also launched projects in regional cities—Chiang Mai, Nakorn Ratchasima, Khonkaen and Phuket. In recent years the firm has diversified into condos and THs, but their contributions to total revenue are modest in percentage terms.

Investment thesis: The market hasn't yet priced in a record high net profit for FY11 (16% core profit growth and a Bt1.9bn gain on the sale of KH shares). LH trades at an FY11 core PER of 16.3x and a net PER of only 12.8x, deeply discounted to its FY05-10 mean of 17.3x. The dividend yield outlook is attractive at 5.9% for FY11 and 6.3% for FY12. Over the medium-term, sales of serviced apartment buildings to a property fund will boost the bottom-line (which would mean an earnings forecast upgrade). Our TRADING BUY rating stands with a YE11 target price of Bt7.50, based on a sum-of the-parts methodology—a housing PER target of 17.3x (equal to LH's FY05-10 mean) and Bt2.90/share of investment value.

Best core earnings since FY05: We forecast a core profit of Bt4.2bn for FY11, the best year since the peak of Bt4.7bn in FY05. We anticipate that LH will achieve 20% housing revenue growth, enabled by an aggressive launch schedule. Note that total 1H11 presales jumped 24% YoY and low-rise bookings by 31% YoY. We expect the firm to report YoY and QoQ core profit growth for 3Q11, followed by even higher 4Q11 numbers, boosted by revenue from the transference of three condominiums.  

Huge gain from asset divestment soon: LH intends to divest its serviced apartments to a (newly set up) property fund, probably in 4Q11 or 1Q12. The firm has five properties at good locations in central Bangkok—Ratchadamri Road, Sathorn Road, Wireless Road, Soi Thornglor and at Promphong. Assuming all the buildings are sold for an investment value of Bt6.7bn (implying a net yield of 7.3%, based on FY10 income), we estimate a Bt991m gain (Bt0.10/share) for LH—a 21% boost to our FY12 profit forecast. We believe Terminal 21 (serviced apartments and retail space; to launch in 4Q11) will mitigate the effect of the loss of income from the five properties (only 4% of total revenue in 1H11).

Hidden value in the investment portfolio: The firm has substantial investment holdings—35.75% of LHBANK, 30.09% of HMPRO and 21.16% of QCON—all listed on the SET. We estimate LH's unrealized gain from its portfolio at Bt12.5bn, or Bt1.25/share

Outlook

FY11 earnings will be the best in six years: LH's launch schedule for this year is a record high of Bt42bn; management targets 30% housing revenue growth for FY11. We conservatively forecast 20% expansion to Bt20bn, but that would still be the highest housing income in six years (LH's revenue peaked at Bt23bn in FY05). In 1H11, the firm posted impressive total presales of Bt11bn, up 24% YoY. Low-rise (SDH and TH) bookings shot up 31% YoY during the period (and record high low-rise presales of Bt4.9bn in 2Q11). In July, presales sustained double-digit YoY growth. We forecast that low-rise income will comprise 85% of FY11 housing revenue. Thus, we anticipate core profit growth of 16% to Bt4.2bn for this year (the best since the FY05 peak of Bt4.7bn).

Condo backlog to boost revenue in 4Q11: LH has three condominiums to transfer in 4Q11—Ocas HuaHin (Bt1.6bn total project value; 50% booked), The Room Sathorn-Taksin (Bt1.3bn; 50% booked) and The Key Paholyothin (Bt960m; 90% booked). The three projects secure 20% of our 4Q11 revenue forecast, making for the best quarterly bottom-line of the year.

Risks

Economic risk: Any disappointment over the scale of the domestic economic recovery would hit residential demand. Thai GDP growth correlates closely with house registration growth (GDP leads housing demand growth by two quarters).

Recommendation and valuation

Valuations are not priced in the best core profit since 2005: Our TRADING BUY rating stands with a YE11 target price of Bt7.50, based on a sum-of the-parts methodology—a housing PER target of 17.3x (equal to LH's FY05-10 mean) and Bt2.80/share of investment value (a 15% discount to the calculated value of the investments). The market hasn't yet priced in a record high net profit for FY11 (16% core profit growth and a Bt1.9bn gain on the sale of its holding in Bangkok Chain Hospital Plc). The dividend yield outlook is attractive at 5.9% for FY11 and 6.3% for FY12. LH trades at an FY11 core PER of 16.3x and a net PER of only 12.8x, deeply discounted to its FY05-10 mean of 17.3x. The firm will deliver both YoY and HoH earnings growth in 2H11 (62% of our forecast FY11 profit).

Apart from LH's core business, it has substantial investments—holdings in LHBANK (35.75%), HMPRO (30.09%) and QCON (21.16%). We calculate an unrealized gain of Bt12.5bn, or Bt1.25/share. Over the medium-term, sales of serviced apartment buildings to a property fund will boost the bottom-line (which would mean an earnings forecast upgrade).