Land & Houses

Land & Houses Plc (LH)

In line with our model
LH reported a record core profit of Bt1.7bn for 3Q13 (beating a record 2Q13 core profit), up by 13% YoY and 3% QoQ. The core result was in line with our estimate and the street number. In 3Q13, LH booked a one-time net gain of Bt160m from selling an old land plot, so net earnings were Bt1.8bn, up by 44% YoY and 22% QoQ (10% above the street estimate).  
Results highlights
The impressive YoY core earnings growth was led by fatter housing GM (from 35.1% in 3Q12 to 35.4%) and a lower SG&A/sales ratio (from 15.1% in 3Q12 to 14.6%). Residential sales were flattish YoY at Bt6.3bn during the quarter.
The QoQ growth was led by 13% residential sales expansion and Bt80m in dividend income from BTS (LH has 60m BTS shares, which it classifies as a long-term investment).  The QoQ residential income rise was driven by condo transference, which more than doubled to Bt1.3bn (mostly The Room Sukhumvit 21 and The Room Sukhumvit 40). GM dipped from 36.5% in 2Q13 to 35.4% in 3Q13 because of a changed sales mix (GM for LH’s condo projects is typically slimmer than for its SDH developments).
Profit-sharing from affiliates dropped by 5% YoY (lower profit at QH) and 15% QoQ (lower profit at LHBANK). Net gearing rose from 0.8x at end-June to 1.0x at end-Sept, due to an asset purchase in the US.
Outlook
4Q13 profit is expected to decline slightly QoQ and be flattish YoY. Two small condos will start transferring in 4Q13—The Key Udomsuk (Bt300m project value) and North 1-Chiangmai (Bt160m).
What’s changed?
We conservatively maintain our model unchanged, as 9M13 earnings represent 74% of our full-year forecast (77% of the street projection). There would be scope for upside to our net profit forecast from asset sales to a property fund (planned spin-offs are likely to be postponed from 4Q13 to 1Q14). The new property fund will include retail space at Terminal 21 (owned by LH) and Hua Hin Market Village (owned by HMPRO; LH holds 30% of HMPRO). The total fund size is expected to be Bt10bn. We would expect the sale of Terminal 21 to make for about 20% upside to our FY14 net profit forecast.
Recommendation
Now is a good time to take positions, as LH trades at an FY14 PER of 13x, a 19% discount to its FY06-12 mean.  Its valuation would look much cheaper if it were to realize gains from asset sales to a property fund and/or divest investments. We have a TRADING BUY rating with a YE14 target price of Bt12, based on a sum-of-the parts valuation—a target housing PER of 16x (equal to its FY06-12 mean) and Bt4/share of investment value.