Land & Houses

Land & Houses Plc (LH) 

 

Below BLS estimate and the consensus forecast

LH reported net profit of Bt1.35bn for 1Q15, down 5% YoY and 59% QoQ (Bt1.5bn gain from selling the Terminal 21 mall to a REIT in 4Q14). The result was 10% below our estimate and 16% lower than the consensus forecast due to disappointing residential sales (4% below our estimate) and weaker-than-expected residential GM (32.4%; 35.5% of our model).   

Results highlights 

Poor earnings were dampened by weak residential sales (down 6% YoY and 30% QoQ to Bt5.2bn: the breakdown is 69% SDH, 26% condo and 5% TH) and slimmer residential GM. In a negative surprise to us and the consensus, LH reported residential GM of 32.4% in 2Q15 (the lowest quarterly GM since 1Q12), a dip of 2.3% YoY and 1.0% QoQ due to higher indirect costs and low GM of Wan-Way-La condo. SG&A/sales rose from 13.0% in 1Q14 to 14.7% in 1Q15, but were down from the high base set at 16.9% in 4Q14 (provisions for a court case and bonus expenses). Profit-sharing from affiliates rose 3% YoY (thanks to LHBANK equity income) but slid 15% QoQ (weak HMPRO and QH). Net gearing improved from 0.7x at YE14 to 0.6x at end-March 2015 (the lowest since YE10).   

Outlook 

Core profit is expected to decline YoY but rise QoQ for 2Q15. Residential revenue will dive YoY due to the high base set by condo revenue in 2Q14. There are no new condos scheduled to start transferring in 2Q15. Residential GM in 2Q15 is unlikely to beat the high base at 37.2% in 2Q14.   

What’s changed? 

Core profit for 1Q15 comprises 17% of our FY15 forecast (18% of the street’s number), as we keep our model unchanged (12% core profit growth for FY15 and 3% growth for core EPS, fully diluted of LH-W3). Scope exists for an earnings upside from its non-residential sales business.  LH plans to acquire an apartment building in the US (Bt2.5bn). Meanwhile, it is expected to realize big gains if it were to sell other investments. LH owns two serviced apartment buildings in California (bought in 2013) and three serviced apartment buildings (at the Terminal 21 complex, Ratchadamri, and Ploenchit roads) that it might sell to a REIT.

Recommendation 

In the short term, the market should react negatively to the disappointing 1Q15 results, which sets up an opportunity to accrue the stock. Its good entry price is near/below Bt9/share, implying a 10% discount to its long-term PER mean. We prefer LH’s promised strong earnings growth profile for YF16 (to outperform the sector mean), driven by a huge backlog of condo transfers. Four sizable condos with total value of Bt19bn are scheduled for completion and to transfer in FY16 against only Bt6bn for FY15. LH trades at an FY15 PER of 14.1x, below its 15.3x of its FY06-14 mean. Our BUY rating stands, and a YE15 SOTP-derived target price of Bt11, pegged to residential PER of 20x (1SD above its FY06-14 mean) and Bt2.6/share of investment value (20% discount to market value).