Pruksa Real Estate

Pruksa Real Estate Plc (PS)  

 

We have shunned PS since May due to poor margin and forecast cuts but there is now little risk to margin and presales are on track to reach its full year target. Earnings will be stronger HoH in 2H15 and into 2016 and there is possible earnings upside this year. We roll TP to mid-2016, raising it to Bt33. Though it has come back up 10% from a 15-month low, valuation remains undemanding at 1.6x PBV and 8.3x PER of 2015, the same level seen during the 2011 floods and 2013 political deadlock (about -1SD of 10-year average). TTR is an attractive 37%; raise to BUY. 

 

Pre-sales to reach target. PS reported total presales of Bt26.5bn (76% low-rise and 24% condo) in 7M15, + 22% YoY, accounting for 56% of its Bt47bn full year target; we believe it can reach its target. Condo presales will miss, as it halved its new launches from 10-12 projects, but this will be offset by higher low-rise presales, despite the fact we do expect low-rise presales to weaken 8% HoH in 2H15.   

2H15 outlook. Earnings are poised to strengthen HoH in 2H15 on higher revenue recognition, especially for condo (Bt5.4bn in 1H15 versus Bt9.6bn in 2H15) and economies of scale. SG&A/revenue should not jump as it will launch only three to four condos in 2H15. We expect 3Q15 to be this year’s peak, with earnings simmering down in 4Q15. As of July, backlog was Bt36.4bn, securing 90% of 2015F. We see upside risk to our forecast, as this year’s transfers of condo backlog exceeds our revenue forecast by 20% and it also has potentially higher revenue from low-rise. Note that the miss in condo presales has no effect on revenue this year.  

 

2016 outlook. We forecast earnings growth of 14% YoY in 2016 on 12% revenue growth and sustainable gross margin at 34.2% as there will be a smaller portion of low-margin projects. Economies of scale will expand net profit margin by 30bps to 14.4%. Current backlog secures 16% of our total revenue forecast and condo backlog secures 50% of condo revenue forecast.   

 

Property incentive measures. Property developers have asked the government to consider property incentive measures (details in Figure 2). If the government agrees, this will help smooth deed transfers and reduce cancelation/rejection risks. Reducing fees will boost developers’ earnings by less than 1%, while customer cost will be lowered by 2%. PS is situated to be one of the prime beneficiaries. 

 

Wrap-up of 2Q15. PS made net profit of Bt2.2bn in 2Q15, +16% YoY and +143% QoQ, with revenue up 30% YoY and 69% QoQ and economies of scale that pulled down SG&A expense/revenue to 12.9% from 14.9% in 2Q14 and 20.1% in 1Q15. Gross margin was a low 32.4%, distorted by zero margin on sale of undeveloped land. Excluding this gives a real estate gross margin of 33.8%. 1H15 earnings were Bt3.1bn, +4% YoY, 45% of 2015F. 

 

Upgrade to BUY. We roll our valuation over to mid-2016 and this raises TP to Bt33/share from Bt30/share, based on unchanged 2x PBV. At last close, valuation is undemanding, trading at 1.6x PBV and 8.3x PER of 2015, a discount to its 10-year average and about the level seen during the 2011 floods and 2013 political deadlock. 

 

Outlook is better, making TTR of 37% attractive, so we upgrade to BUY from Neutral.