Italian-Thai Development

Hold – Downgrade from Buy; Bt3.72

Price Target : Bt3.75  (Prev: Bt4.93)

Downgrade to HOLD from Buy; cut TP to Bt3.75, pegged to 2x FY12F PBV

Comment on Results

3Q11 result below our and market expectations. ITD turned in a large Bt795m loss in 3Q11 vs Bt363m net profit in 3Q10. However, earnings in the year ago quarter was due to a huge Bt1.4bn gain from sale of investments and Bt89m forex gain. 

Meanwhile, 3Q11 losses were almost double the Bt390m loss registered in 2Q11, due mainly to the sharp drop in gross profit margin to 3.0% in 3Q11 from 7.6% in 2Q11. The thin margin could not cover operating expenses, and operating margin turned negative. Key reasons for the weak operations were: (i) reserve for penalty charges, and (ii) additional operating expenses for mining.

Net gearing is rising. Net gearing rose further to 243% at end-3Q11 vs 210% at end-2Q11. BVps was Bt2.0 at end-3Q11.

Prefer STEC. We believe construction revenue will drop in 4Q11 as some projects are affected by floods. Despite this, we see an improved outlook for ITD and all contractors in 2012, premised on increasing reconstruction activities when the heavy flooding ends.  The stock now offers only 1% upside to our revised Bt3.75 TO that is pegged to 2x P/BV. We prefer Sino-Thai Engineering (STEC), which has a much stronger balance sheet and would also likely get a slice of reconstruction jobs.