Land & Houses

Land & House Plc (LH)

Investment thesis: Over the short to medium-term, we anticipate that market expectations will rise with regard to LH’s earnings outlook, given its surprisingly good 2Q12 results. Our FY12 net profit forecast is 17% ahead of the consensus number (we upgraded our model by 4% for FY12 and 2% for FY13 to factor in the strong 2Q12 profit). We have rolled over our investment horizon to YE13 and arrived at a new target price of Bt9.20, pegged to a SOTP valuation. Our BUY rating stands. We suggest a good entry level would be any price below Bt8, which implies about a 10% discount to the stock’s FY05-11 PER mean.

FY12 residential target growth: LH targets FY12 presales of Bt22bn (up 15%) and revenue of Bt20bn (up 8%), which we believe is achievable. Home demand has recovered faster than management expected following the 4Q11 flooding. 1H12 presales comprise 51% of LH’s full-year target and 1H12 revenue 48% of its full-year target. 1H12 presales rose by 3% YoY, while revenue jumped 16% YoY.

Housing GM—positive surprise: Beating all estimates, housing GM was sustained YoY in 1H12 (LH had budgeted for a 100 bps decline). The strong GM was supported by an ability to pass through rising construction costs for SDHs to customers, due to favorable demand-supply dynamics (industry low-rise launches plunged YoY). Coupled with the prebuilt model (costs fixed before sale), 2H12 housing GM will be stable (or may possibly rise) HoH. 
Plan for new recurring income: The company plans to expand recurring income by acquiring another land plot for a rental development. LH is seeking new opportunities in Bangkok and San Francisco, USA. Project IRR is expected at 12-15%. New investments would mean scope for earnings upside.

Hidden gains on investments: There is significant investment value in associated firms—LHBANK, HMPRO, Q-CON, QH and Starmall (formerly Polar). We calculate the hidden value at about Bt29bn (based on the three SET-listed stocks’ respective market prices and the BVs of the other firms), equal to 30% of LH’s market capitalization. Looking ahead, any divestment of associated companies would bring significant gains.

Recommendation and valuation

BUY with a YE13 target price of Bt9.20: LH is a good match for investors in search of low earnings volatility. Its core profit comprises 67% residential sales, 27% contributions from associates and 6% recurring income (serviced apartments and retail space). We expect a near-term catalyst from a consensus profit forecast upgrade, as the YTD performance of the residential business has beaten both management guidance and the street assumption. The actual 2Q12 result was 12% ahead of the consensus estimate, due to better-than-modeled residential sales and housing GM.
The stock trades at an FY12 PER of 15.8x, a discount to the FY05-11 mean of 16.4x. The dividend yield for FY12 is an attractive 5.4% (interim DPS of Bt0.20; XD on Aug 24). We have rolled over our investment horizon to YE13 and arrived at a new target price of Bt9.20, pegged to an SOTP valuation—a target housing PER of 19x (15% above is FY05-11 mean and Bt2.40/share of investment value). The FY12 core profit will be LH’s best since FY04, so should prompt a valuation re-rating. Our BUY rating stands.