Italian-Thai Development

Italian-Thai Development Plc (ITD)

Yesterday ITD outlined its direction and while we share its optimism on Thailand’s
construction outlook, especially with regards to railway and mass transit projects we
feel ITD’s own investment in Dawei and the potash project are still in very early stages
of development with little progress: financing and strategic partners are yet to be
finalized for Dawei and the potash project is awaiting a license. We maintain Neutral
and see no real catalyst for re-rating - P/BV is in line with historical average - especially
with net gearing likely to remain high (end 2Q12 at 4.2x).

Key takeaways
Backlog: Current backlog (before 3Q12 revenue recognition) is at Bt123bn – nearly
three years of work at present run rate. Projects awarded and close to signing are
worth a combined Bt113bn; of this ITD, expects to sign the Hongsa Lignite Mining
project worth Bt25bn very soon. It is also optimistic on government rail and flood
projects, bids for which are proceeding in phases it says.
Dawei project: ITD still owns 100% in the Dawei project, which has a Build-
Operate-Transfer concession of up to 75 years for a 205 sqkm area in Myanmar. It
plans to eventually reduce its stake to 25%. The project will begin with a road and
port, for which it is currently applying for a JICA loan, followed by an industrial
estate project. Management said the business model for Dawei envisions gaining
profit from selling land to light industries (it has already identified various
strategic partners but these are yet to be finalized given the large size of each
project), which it will then use to re-invest to take a small stake in the light
industries, and then get the construction work for the light industries. ITD has
already spent on Bt2bn on this project.

Potash project: Management expects to obtain the license for this mine located
in Udon Thani next year. We are less certain as ITD has yet to obtain EIA for this
project. It has submitted all the documents to the EIA and is waiting for approval.
Then a third party will have to do a study and do a last round of public hearings -
only then will the license be issued. ITD plans to reduce its stake from 90% to no
less than 50% and use the money to pay off some debt. It has a goal of reducing
net gearing to 2.5x by end-2013 and will use the capital increase requested earlier
under general mandate only as a last resort.

Maintain Neutral. Our target price of Bt3.5/sh is based on EV-to-backlog ratio of 0.5x
(30% discount to historical average to factor in risk of capital increase). We expect a
small core profit of Bt260mn in 2H12F. It had 1H12 core profit of Bt331mn but bottom
line was a net loss of Bt259mn mostly due to provisions on doubtful debt on a project
in Malaysia. True, there is upside risk from gross margin (1H12A gross margin of 9.9%
vs. our 2012F of 7.6%) and ITD could sign more new work than our Bt50bn p.a. for 2012-
13F – but even then our new target price would have little upside to current share
price. We will, however, review our TP after 3Q12 results (to be released in two weeks).