Hemaraj Land & Development
Anticipate both YoY and QoQ profit growth for 3Q13
Hemaraj Land & Development Plc (HEMRAJ)
Investment thesis
HEMRAJ hosted a pre-results analyst meeting yesterday. Despite lower QoQ land transference, management expressed confidence in 3Q13 earnings. The effect of lower guidance for rental portfolio growth should be outweighed by rising equity income from the Gheco-One power station. There is also scope for upside from our current earnings projection from the planned launch of a property fund in 4Q13. Our BUY rating stands with an SOTP-based YE14 target price of Bt4.6, which translates into a core PER of 13x.
3Q13 preview—earnings to post both YoY and QoQ growth
We expect a 3Q13 profit of Bt771m, up by 38% QoQ and 23% YoY. Revenue should be posted at Bt2bn, up 35% YoY but down 16% QoQ on weaker land transference. Water income looks set to report both QoQ and YoY growth, led by increased receipts for potable and clarified water. Revenue from rental properties is expected to have risen YoY and QoQ on an expanded rental portfolio. We assume GM of 52%, up from 46% in 3Q12 on fatter land GM. Equity income from Gheco-One should have turned around to a profit (we model for Bt200m) from a loss in 2Q13 on a higher number of operational days (it was offline only four days in July against 5.5 weeks in 2Q13).
Ready-built factory and warehouse rental targets cuts
Management has revised down its rental portfolio enlargement guidance to 150k sq.m in FY13 (comprising 70k sq.m of occupied warehouse space and 80k sq.m of factory space) from 220k sq.m (comprising 100k sq.m of occupied warehouse space and 120k sq.m of rental factory space). Thus, we have cut our RBF & warehouse rental revenue assumption by 6%. However, the effect of lower rental income will be outweighed by greater equity income from Gheco-One, the availability of which normalized earlier than we had expected. As such, we have upgraded our FY13 earnings forecast by 3% (our YE14 target price stands unchanged).
Scope for profit forecast upgrade from launch of a property fund
HEMRAJ has already applied to the SEC to start a property fund. Management expects to launch an IPO for the property fund before year-end and raise about Bt3.5bn. Factory space totaling 150k sq.m is to be sold to the fund. The proceeds of the IPO will be used to pay down debt and finance future capital plans. HEMRAJ intends to take a 23% stake in the property fund. Although the aggregate book value of the factories has yet to be disclosed, we expect the firm to book a substantial gain, as the construction costs were booked years ago when costs were much lower. We estimate a one-time gain from the asset spin-offs of about Bt1bn.
