Land & Houses

Land & Houses Plc (LH) 

 

Investment thesis

In the short term, LH’s share price will be stifled by weak 3Q15 results and failure to deliver on its FY15 business plan. However, quarterly earnings will become attractive in 4Q15 with the upside from gains on the Terminal 21 hotel sale. FY16 earnings growth profile is promising on our core profit growth forecast of 17%. We have rolled over valuations to YE16 with a SOTP-derived target price of Bt9.80 (housing PER of 16x and Bt3.0/share of market value of investment). LH trades at FY16 PER of 13.6x, a 12% below its FY06-14 mean PER. For long-term investors, this presents an opportunity to accrue the stock if its price fades in the short term.  

Downside risk to LH’s FY15 business plan

We expect presales for 9M15 of Bt17bn (79% in low rise and 21%, condos), down 35% YoY; 20% for low rises and 63% for condos. LH will delay eight project launches valued at Bt12bn from 4Q15 to FY16 resulting in only six low-rise projects to launch in 4Q15 (Bt22bn in total value). Total launches in FY15 are cut from Bt37bn to Bt25bn versus Bt41bn launched in FY14. Thus, there is a 15% downside risk to LH’s presales target of Bt34bn for FY15, as presales in 9M15 would achieve only 50% of its target. The downside risk to its residential revenue target of Bt28bn is 5%.  

Unattractive 3Q15 result but impressive 4Q15

We estimate an unattractive core profit contraction of 12% YoY and flat QoQ in 3Q15 on a 9% residential revenue gain YoY, flat QoQ. Then, LH will report the best quarter of the year in 4Q15—potential record core profit. Three sizable condos will drive that record residential revenue of Bt10bn in 4Q15—The Key Wutthakat (Bt1.2bn, fully booked), The Room Pan Road (Bt1.7bn, 72% booked) and The Room Rama IV (Bt2.2bn, fully booked). 

Scope for upside from hotel sales in 4Q15

LH plans to divest its Terminal 21 hotel (LH holds 60% of the asset) to a newly set-up REIT in late 4Q15. The fund’s size is expected at Bt4bn. There will also be gains from the sale, providing scope for earnings upside to us and the market. Assuming a 15% reinvestment rate in the new REIT, we estimate a Bt775m net-of-tax gain for the sales, implying an 11.4% upside to our FY15 bottom line (Figure 7). Gains from the asset sale will probably boost dividend upside to FY15 (we assume Bt0.23 of DPS for 2H15 core operations, a 2.6% simple yield and 5.3% annualized yield). 

Promising outlook for FY16

The earnings growth outlook for FY16 has high visibility on Bt19bn of condos scheduled for completion against Bt6bn for FY15. Three sizable condos start transferring in FY16—The Room Sukhumvit 69 in 1Q16 (Bt2.6bn in total value, 45% booked), 333 Riverside in 3Q16 (Bt7bn, 90% booked), The Room Sathorn 11 (Bt1.9bn, 29% booked) and The Bangkok Sathorn in 4Q15 (Bt7.5bn, 56% booked). Presales backlog secures 23% of our FY16 residential revenue forecast, the company’s highest on record.