SC Asset Corporation

SC Asset Corporation Plc (SC) 

 

Investment thesis

SC has good earnings growth outlook at 8% in FY16 with irrationally cheap valuations at an 8% discount to its FY16 BV, but without the recap risk. Thus, our TRADING BUY stands, with a YE16 SOTP-derived target price raised to Bt3.60/share (from Bt3.40 on a FY16 upward earnings revision), pegged to a residential business PER target of 7x (near its FY06-15 mean) and Bt0.7/share of rental market value (50% discount). 

Earnings upgrade for FY16 but diminishing FY17 outlook

We have revised up our core profit forecast 4% for FY16 but cut it 2% for FY17. We have a more optimistic outlook on residential GM in FY16-17 (up from 33.2% to 34.4% in FY16-17) after SC proved strong residential GM of 34.9% in FY15 (up 0.5% YoY despite economic uncertainty last year). Modeled residential revenue is assumed to be manageable at 8% growth in FY16 and 7% in FY17. SC has high earnings visibility in FY16, as backlogs secure 34% of our residential revenue forecast, which is high due to SC’s prebuilt strategy for low rises and two great Centric condos in prime locations that will transfer in 1H16 (Huai Khang, Bt2.9bn, 71% booked; and, Ari, Bt2.7bn, 96% booked). However, we conservatively forecast 2% core earnings growth in FY17 to reflect low revenue visibility (backlog secure 11% of our FY17 residential revenue forecast). 

Active FY16 business plan

New launches are set to jump from Bt12bn in FY15 to Bt23n in FY16—new low-rise project value growth of 127% YoY to Bt13bn, condo growth of 66% to Bt10.5bn. Management has targeted presales growth of 20% to Bt15bn for FY16—up 11% YoY for low-rise presales and up 35% for condos. In our view, its low-rise presales target is likely achievable with an 11% growth rate in FY16 followed by larger launches and an 18% jump in FY15. However, if two new luxury condo take-up rates (BEATNIQ, Bt4bn in project value and a Chidlom property, Bt6.5bn) come in below 50%, we anticipate a single-digit downside risk to the FY16 presales target. SC conservatively aims for total revenue growth of 7% to Bt15bn in FY16 (94% of residential revenue and 6% of rental income)—high visibility on a 38% guaranteed by condo presales backlog and recurring office income. 

Heading to Bt20bn total revenue in FY19 with fatter net margin 

Managements has reaffirmed that it can sustain earnings growth over the long term. Thus, SC aims for total revenue of Bt20bn in FY19 (a 13% CAGR for FY16-19). The firm will maintain itself as a leading brand in the luxury segment (selling price above Bt15m/unit). In addition, it will expand into the upper-mid-end segment (selling price of Bt3-5m/unit) from “negligible” in FY15 to 10% in FY19. Crucially, its net margin targets will improve from 12.8% in FY15 to 15.0% in FY19 mainly due to a reduced SG&A expense to sales ratio (in a proven recovery from peaking at 22.5% in FY13 to 19.3% in FY15 and target to 19.0% in FY16). Its revenue breakdown is 95% in residential sales and 5% in rental income.