SC Asset Corporation

SC Asset Corporation Plc (SC)

In line with our model: SC reported a net profit of Bt177m for 2Q12, down by 51% YoY and flat QoQ. The result was in line with our estimate but 16% above the consensus (due to better-than expected GM). Excluding a Bt31m gain from reappraised property assets, 2Q12 core profit would be Bt146m, down 18% QoQ, as expected.
Results highlights: The core earnings weakness was due to a housing sales plunge of 39% YoY (and 6% QoQ) to Bt1.1bn (mainly low-rise). In 2Q11, SC transferred Centric Scene Ratchavipa condo. Housing GM fattened from 33.2% in 2Q11 and 33.6% in 1Q12 then to 34.5% in 2Q12. The SG&A/sales jumped to 24.4% from 21.9% in 1Q12, due to lower housing revenue. Net gearing rose from 0.75x at end-March to 0.91x at end-June.
Outlook: We expect SC’s 3Q12 earnings to be flat YoY and stronger QoQ. Low-rise will continue to dominate sales. 4Q12 profit will be the best of the year (up both YoY and QoQ). The condo presales backlog will start to transfer—Centric Ratchada Suthisan (Bt900m; fully booked) and The Crest Phahol 11 (Bt900m; 78% booked), and The Crest Sukhumvit 49 (Bt46m; 73% booked).
The leverage ratio will remain high till condo transference in 4Q12. Management says rising leverage will support housing portfolio expansion and earnings growth over the long-term. The net gearing ratio can rise to about 1x without raising recapitalization concerns.
What’s changed? 1H12 net profit represents 26% of the full-year forecasts of both ourselves and the street. For the time being, our model stands unchanged, as the 2H12 earnings outlook is for both YoY and HoH growth. 
Recommendation: SC is the cheapest stock in the sector. Its multiples are low—an FY12 PER of 7.2x, a deep discount to its FY05-11 mean of 11.7x. We maintain our BUY rating with an unchanged YE12 target price of Bt19, pegged to a PER of 9x (20% below its FY06-11 mean), and Bt5.8/share of rental asset value (a 20% discount to appraised value).