Hemaraj Land & Development

Hemaraj Land & Development Plc (HEMRAJ)

 

Investment thesis

Fundamentally, we maintain our HOLD rating on HEMRAJ, with target price Bt4.40. However, for risk-averse investors, we recommend buying into HEMRAJ ahead of WHA’s next Tender Offer (TO) round in November-December (subject to SEC approval for an early TO). We see the 3.3% pricing gap between the current market price and the TO price of Bt4.40 as a safe bet. If there are any hiccups early on in the TO process, investors will get a huge one-off dividend before year-end as an added bonus (due to WHA’s loan payment schedule). We estimate a DPS of Bt0.78 for the 2015 year-end announcement—an 18% yield on the current market price.

Result recap—2Q15 beats expectation

HEMRAJ reported 2Q15 core net profit of Bt787m, up 18% QoQ, but down 21% YoY. The result beat our estimate by 20%, mainly due to much higher services GM than anticipated—at 62.9%, compared to the long-term average of 46.2%. Land presales were as per our expectation at 169 rai, but, services revenue also beat our estimate by 22% and power income was lower than expected, due to higher FX loses. A Bt0.443 DPS for its 3Q14-1Q15 operations and non-core asset spin-off was paid on July 31.

Recurring income to support 2015 core earnings

Power and services income will make up 91% of 2015 NPAT, higher than the usual average of 53%. The jump in services income this year is mainly due to higher capacity fees and charges, for which we expect the gross profit margin from this business to sustain above the 60% mark going forward. However, in tandem with our unexciting sector outlook, we also believe that HEMRAJ’s presales and land transfer numbers will be slower in 2H15. Thus, we revise our 2015 presales and transfer estimate for the firm down to 900 rai and 865 rai respectively.

Limited price downside with TO on the table

With WHA’s second TO for the remaining 691,031,781 shares on the table, HEMRAJ’s stock price downside is limited to the tender price of Bt4.40. We see this 3.3% pricing gap between the current market price and the TO price as a safe bet. The tentative timeline for the TO is during Nov-Dec 15 as WHA is seeking SEC approval for an early TO. However, if this is to be denied, the 1-year grace period for a second TO round will expire in March 2016, when we expect WHA to be offering the same conditions.

Added bonus if TO is delayed

Should the early TO be denied, shareholders will receive a hefty special dividend from H-REIT divestment (Bt7bn proceed size) and 2Q15-3Q15 operations—we estimate a DPS of Bt0.78, implying an attractive 18% yield on the current price. WHA would require this dividend before 2015 year-end in order to comply with its bond covenant of a 2.50x gearing ratio (currently at 3.52x) by paying off its leveraged buyout loan before 2015’s books close. We have already seen an instance of a special dividend payout in July as a result of its non-core asset sell-off.