Quality Houses

Below our estimate

QH posted a core profit of B1.1bn for 3Q14, up by 21% YoY and 9% QoQ. Earnings were 8% below our estimate, mainly due to disappointing residential GM, but the result was in line with the consensus number.  

Results highlights 

Residential sales hit an all-time high of Bt6.2bn in 3Q14, up by 23% YoY and 13% QoQ (65% low-rise and 35% condo), led by low-rise (also, construction of Q.House Sukhumvit 79 was completed ahead of the 4Q14 schedule). Low-rise sales rose by 31% YoY and 16% QoQ to Bt4bn. Condo revenue expanded by 11% YoY and 10% QoQ to Bt2.1bn. QH posted slimmer residential GM—from 32.6% for 3Q13 and 33.2% in 2Q14 to 31.7% for 3Q14—due to lower condo GM of 33.1% (down by 2.3% YoY and 3.0% QoQ, due to a different product mix). Low-rise GM was 31.0%, up 0.1%% YoY but down 0.6% QoQ. The SGA/sales ratio declined by 0.7% YoY and 1.1% QoQ to 15.4%, due to top-line growth. 

Equity income from affiliates increased by 30% YoY and 7% QoQ to Bt267m, led by HMPRO and LHBANK. Net gearing declined from 1.3x at end-June to 0.8x at end-Sept (the lowest ratio since 2010). 

Outlook 

QH saw its peak for the year in 3Q14. It will post YoY growth but a QoQ dive for 4Q14. The strong expected YoY expansion will be driven by low-rise sales and transference of remaining units at two condos—The Trust Condo Hua Hin and Q.House Sukhumvit 79. QH delayed transferring Casa Condo Campus Doi Suthep (Bt330m, 15% booked) from 4Q14 to 1Q15.

What’s changed? 

Our model stands unchanged, as 9M4 profit comprises 76% of our forecast. But 9M14 earnings comprise 83% of the street full-year consensus forecast, so we expect it to be upgraded . QH says it will beat its FY14 residential revenue target of Bt19.4bn (up 5%); our forecast is Bt20bn (up 8% YoY). The firm won’t post any extra gains from asset sales in the near future, as it cancelled its plan to divest Centre Point Silom. 

Recommendation 

We have a BUY rating with a YE15 target price of Bt5, based on a sum-of the-parts valuation—a housing PER of 12x (1SD above its FY06-13 mean) and Bt1.4/share of investment value (market price). QH currently trades at an inexpensive FY15 PER of 9.0x, near its FY06-13 mean—it has the third-lowest multiples of our coverage (after AP and SC). FY14 presales will probably miss the firm’[s target of Bt21bn by about 3%, as the launch of The Trust Condo Rattanatibet (project value of Bt2bn) was postponed from 4Q14 to FY15. However, QH rushed to open The Point Laemchabang in 4Q14 (Bt600m), a new low-end condo brand priced at below Bt1m/unit.