Quality Houses

Quality Houses Plc (QH) 

 

Above BLS estimate

QH posted a core profit of Bt674m for 2Q15, down 31% YoY but up 14% QoQ. This was 11% above our estimate due to better-than-expected other income from its rental business, but in line with the consensus forecast. There is no extra item for 2Q15 against a Bt30m provision for 1Q15.

Results highlights 

The weak core profit YoY was due to poor residential sales, down 22% YoY to Bt4.2bn (2% down for low-rise revenue and 58% down for condo revenue), slimmer residential GM and higher SG&A/sales ratio. The residential revenue breakdown is 89% low-rises and 19% condos. In negative evidence for the market, residential GM dropped 2.8% YoY and 1.9% QoQ to only 30.3% for 2Q15 (the lowest since 1Q12) due to low the GM of high-end SDH and non-Bangkok condos (The Trust condos in Nakhon Pathom and Pattaya). The SG&A/sales figure was high at 19.9% for 2Q15 versus 16.5% for 2Q14. Profit growth QoQ was driven by 16% residential sales growth and 1.3% lower SG&A/sales. Equity income from affiliates rose 19% YoY and 12% QoQ thanks to HMPRO profit, LHBANK and QHPF. Its net gearing ratio dipped QoQ to 1.3x at end-June. 

Outlook 

Earnings for 3Q15 will drop YoY due to the high base set by core profit of Bt1.1bn for 3Q14 (record residential revenue of Bt6.2bn). There are no new condos to start transferring in 3Q15. GM will be squeezed YoY. However, 3Q15 profit should expand QoQ on top-line growth and lower SG&A/sales.  QH will resume YoY and QoQ profit growth in 4Q15 when Q.Condo Asoke starts transferring (Bt3.4bn of total value, 90% booked). 

What’s changed? 

According to the bearish guidance from management on BLS Property Day (report on July 2), coupled with a 22% YoY core profit contraction for 1H15, we have cut our core profit forecast 9% to Bt3.3bn for FY15 and 14% to Bt3.7bn for FY16. The modeled residential revenue forecast is cut 5% to Bt21bn for FY15 and 10% to Bt23bn for FY16. We cut residential GM assumptions by 1.0% to 32.0% for FY15 and 1.2% to 32.3% for FY16; SG&A/sales are up 0.5% for FY15-16 to reflect intense competition. Core profit for 1H15 is 38% of our FY15 forecast and 35% of the street’s. 

Recommendation 

Short term, the share price will be under pressure on the downside risk from the consensus forecast and unattractive earnings for FY15 (we see a 15% core EPS drop by the dividend stock dilution). But, the compelling valuations will mitigate a sharp price fall. QH trades at FY15 PER of 7.6x, a 16% discount to its FY06-14 mean, the deepest to the long-term mean of our coverage. Our long-term BUY rating stands with a new SOTP-derived YE15 target price of Bt2.8 (from Bt3.2) to reflect the downward earnings revision, pegged to a housing PER of 9x (FY06-14 mean) and investment value of Bt1.1/share (20% discount to market value).