Quality Houses

Quality Houses Plc (QH) 

 

Above BLS and street estimates

QH posted quarterly record core profit of Bt1.3bn for 4Q15, shooting up 101% YoY and 129% QoQ. The result was 14% above our estimate (we had overestimated tax expenses in 4Q15, but sales, GM and SG&A/sales are in line with our forecast), and 19%, beating the street forecast. FY15 core profit was Bt3.1bn, down 7% YoY, in line with BLS and the consensus forecast. QH announced final DPS of Bt0.09 for 2H15 operations, a 3.9% simple yield, XD on 29 Apr and payment on 17 May. 

Results highlights 

Impressive 4Q15 profits were down to record residential sales and lower SG&A/sales. Residential sales the hit quarterly record at Bt7.3bn for 4Q15 (62% low rises and 38% condos), up 54% YoY and 82% QoQ. Low-rise sales rose 13% YoY and 33% QoQ to Bt4.5bn. Condo revenue shot up 272% YoY and 353% QoQ to Bt2.8bn due to the transfers starting at Q Asoke condo (Bt3.5bn of total project value, 98% booked, 66% transferred in 4Q15). Residential GM dipped 2.1% YoY but gained from the deep low base of only 30.2% in 3Q15 to 31.1% in 4Q15 (29.5% GM for low rises; 33.6%, condos). SG&A/sales plunged 8.6% YoY and 5.9% QoQ to 15.4% in 4Q15 after top-line growth. Equity income from affiliates rose 22% YoY and 23% QoQ thanks to HMPRO profit growth, LHBANK and QHHR. Its net gearing ratio dipped from 1.3x at end-Sep to 1.1x at YE15.

Outlook 

Earnings for 1Q16 are expected to expand YoY but plunge QoQ.  Residential revenue will grow YoY by the low base set in the 1Q15, but down QoQ (unlikely to beat its record in 4Q15). QH will transfer the rest of the Q Condo Asoke units and start on the small Casa Condo Si Racha units (Bt476m project value, 24% is booked). SG&A/sales will improve YoY, benefitting from QH’s efficiency improvement policy in FY16.   

What’s changed? 

Earnings visibility in FY16 is low, as its new condo completion schedule will plunge 49% YoY to a total of Bt4.5bn (with 48% booked) in the full year. Thus, we have cut our core profit forecast 3% to reflect a modeled residential sales cut of 3% to Bt21.7bn. We took the conservative view for a 7.7% residential revenue growth in FY16 (below the management’s target growth of 10%)—only 15% is guaranteed by backlogs at YE15. We assume a high SG&A/sales ratio of 19% for the full year (up 20bps), reflecting intense marketing expenses to boost sales and transfers. 

Recommendation 

Our HOLD rating stands. The cheap valuations are deserved for its unattractive FY16 profit growth. Only low valuations will mitigate the sharp price fall, as QH trades at FY16 PER of 7.6x, far below 9.1x of its FY06-14 mean. Our new SOTP-derived YE16 target price is Bt2.50 (down from Bt2.6, to reflect diminishing earnings forecast), pegged to a housing PER of 8x and investment value of Bt1.3/share (20% discount to market value).