Quality Houses

Quality Houses Plc (QH)

 

 

Investment thesis

We like QH for its sector-beating FY15 earnings growth profile (21% for QH versus a 12% mean for our coverage). Our SOTP-derived YE15 target price is Bt5.2—a housing PER of 12x (1SD above its FY06-13 mean) and investment value of Bt1.6/share. QH deserves to trade at a premium ahead of the second-best FY15 profit growth of our coverage. Its FY15 PER is currently 9.3x (against a 12.1x coverage mean). Excluding investment value, the firm’s ResDev business trades at a PER of only 8.8x.

Low-end to mid-range expansion proves successful

The low-end to mid-range segments (Casa, The Trust and Gusto) comprised 83% of residential revenue in 1H14. Low-end to mid-range income rose 11% YoY to Bt7.7bn in 1H14, despite the political chaos (following substantial growth of 67% in FY13). We believe that QH will add more low-end to mid-end projects in 2H14. As such, total launch value may rise 10% from our Bt22bn assumption. Low-end to mid-range projects will comprise about 85% of launch value.     

Manageable balance sheet, despite CAPEX hike 

Despite aggressive land acquisition of Bt5.7bn in 1H14 (against historic land CAPEX of ~Bt3bn/year), QH’s net gearing ratio remained stable at 1.4x at end-June (a 1.2x coverage mean). The 2H14 land CAPEX budget is Bt1.8bn. QH intends to de-leverage to a net gearing ratio of 1.1x at YE14. The firm is aggressively seeking land for launches in FY15-16. It has acquired plots to develop both low-rise projects and condos in Bangkok and the provinces.

Impressive FY15 revenue growth profile isn’t yet priced in 

The street has too bearish on QH’s FY15 outlook, we believe. Management targets residential revenue growth of 25% for FY15 the consensus assumption is only 14%. We assume FY15 top-line growth of 19% to Bt25bn versus a street projection of Bt22bn. As such, our FY15 profit forecast is 19% ahead of the street model. The impressive expected top-line growth will be driven by condo transference. Five condos with a total value of Bt8.3bn will complete construction and transfer in FY15 versus only three condos worth Bt4.7bn in FY14.

GM is on the rise 

Residential GM fattened from 31.8% in 1Q14 to 33.2% in 2Q14, beating the company’s target of 33%. GM is expected to rise from 32.6% in 1H14 to 33.9% in 2H14, boosted by fat-GM TH and condo projects. GM is on an uptrend, led by shorter construction periods for low-end to mid-range low-rise projects with the use of tunnel and precast technology (only 3-4 months for construction). Management’s FY14 residential GM target of 33% looks comfortably achievable; QH targets FY15 GM of 34%.