Quality Houses

Quality Houses Plc (QH)
 

What’s new? Management guides that the asset divestment plan is progressing well. QH plans to sell three serviced apartment buildings to a newly established property fund—Centre Point Hotel & Residence Petchaburi (freehold), Centre Point Hotel & Residence Sukhumvit (freehold) and Centre Point Hotel & Residence Langsuan  (leasehold with 14 years remaining). The fund size is expected at Bt3.4bn with a yield guarantee of 7.4% for the first three years. The total sales price is likely to be discounted to the appraisal value by 2-8%. We expect the process to be completed in July. 
Comment: Assuming that QH will hold 25% of the property fund, we estimate a huge gain of Bt1.1bn (Bt0.12/share) for the firm because of the low book value of Bt1.4bn in total against a sales price of Bt3.4bn (details in Figure 1). We estimate a net cash inflow of Bt2bn, which QH will use mainly to pay down debt.  The net gearing ratio is expected to decline from 1.6x end-March to 1.4x end-Sept. The gain will make for a record high net profit in 3Q12. Excluding the item, QH would still be expected to deliver both YoY and QoQ core profit growth, driven by low-rise sales and margin expansion from the low base set last year.
Over the long-term, although QH’s effective holding in the three serviced apartment buildings will drop from 100% to 25%, the net impact on its long-term profitability will be only modest—the three assets will operate at higher net margins under the property fund (property funds are exempt from corporate income tax). The combined rental space of three assets comprise roughly 34% of the firm’s rental income. We estimate the net profit contribution from the three buildings at Bt50-60m annually, which is lower than the Bt62m guaranteed dividend receivable from property fund (QH will receive 25% of that, assuming its stake in the property fund is 25%).
Action: Record presales in 2Q12 followed by the substantial gain from asset sales to the property fund in 3Q12 will boost interest in the stock. QH is cheap—an FY12 PER of 5.7x, about 1SD below its FY05-11 mean—the deepest discount to its historical average of any top-tier Residential Developer under our coverage. Our BUY rating stands.