Quality Houses

Quality Houses Plc (QH)

Above all expected: QH reported a 2Q12 core profit of Bt337m, up by 18% YoY and 11% QoQ. Core earnings were 10% above our estimate and ahead of the consensus because housing GM beat our model (31.2%; we had assumed 29.7%). Net profit was Bt339m, down by 7% YoY and but up 25% QoQ (QH booked an Bt82m marked-to-market gain on its stake in of LHRB for 2Q11 against a Bt34m loss for 1Q12).
Results highlights: The impressive 2Q12 core profit was driven by a big jump in housing GM and a lower effective tax rate. QH surprised the street (and us) by reporting its best housing GM since FY08, led by new low-rise projects—31.2% in 2Q12 versus 29.3% in 2Q11 and 29.6% in 1Q12. Low-rise GM was 31.1%, up by 2.8% YoY and 2% QoQ. The fatter core margin outweighed the effect of a 9% YoY housing sales contraction to Bt2.4bn. 2Q12 housing revenue comprised 82% low-rise, the remainder condo (mainly Q.Langsuan).
Equity income from affiliates (HMPRO, LHBANK and QHPF) jumped 22% YoY. The net gearing ratio rose to 1.7x at end-June from 1.6x at end-March
Outlook: We expect strong core profit growth in 3Q12, both QoQ and YoY, driven by the start of transference of the Trust Residence Pinklao condo in Sept (Bt2.3bn; 73% booked) and fatter housing GM (it was only 28% in 3Q11). Moreover, gains from asset sales (Center Point Petchaburi, Sukhumvit and Langsuan) to a property fund of about Bt700m (lower than our earlier assumption, due to high provision-setting) will make for a record 3Q12 bottom-line. Significantly, net gearing at end-Sept will drop to 1.5x.
What’s changed? 1H12 core profit represents 49% of our FY12 core forecast. We see scope for earnings upside from GM expansion. Our FY12 projection is 7% ahead of the consensus.
Recommendation: There are two catalysts in the near-term—a record high 3Q12 net profit, which will prompt a consensus forecast upgrade, we expect. The stock trades at an FY12 PER of 8.1x, about 1SD below its FY05-11 mean. Our BUY call stands with a YE12 target price of Bt2.20, based on a sum-of-the-parts valuation (a target housing PER of 6.6x and Bt1.85/share of investment and rental asset value).