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Quality Houses (QH TB) Summary

Core Content

Quality Houses (QH TB) is a real estate company in Thailand, currently trading at THB2.70 with a target price of THB2.30 (-15%). The company has a market capitalization of USD761M and an average daily trading volume of USD3M. The firm is rated as a SELL with a contrarian stance, indicating a negative outlook on its performance and valuation.

Main Points

• 4Q13 Earnings: QH reported property sales of THB4.7b, down 7% QoQ and 7% YoY, resulting in an EPS of THB0.08. The company also announced a dividend of THB0.09/share, yielding 3.3%.
• FY14 Revenue Target: Management set a revenue target of THB19.4b for FY14, but the analyst estimates it at THB16.3b, indicating a potential downside risk. The target was set before the Bangkok Shutdown, which may impact performance.
• Project Launches: QH plans to launch 26 projects worth THB22.3b in FY14, up from THB20b in FY13. Approximately 70% of these will be in Bangkok, with all land secured. The product mix includes 34% single detached houses (SDH), 34% townhouses (TH), and 32% condominiums.
• Backlog: As of end-FY13, QH had a backlog of THB9b, with THB4.8b expected to be recognized in FY14 and the remaining THB4.2b in FY15.
• Valuation: The analyst maintains a SELL rating with a target price of THB2.30, based on an 8.0x FY14 P/E ratio, which is 0.5 SD below the 7-year average. The company is viewed as overvalued compared to its investment portfolio and sector peers.
• Peer Comparison: QH's core P/E ratio is 9.3x, higher than the sector average of 9.0x. The company also has a lower ROE (15.0%) compared to peers like AP (14.9%) and SPALI (26.5%).
• Profitability: QH's gross margin improved slightly to 33.3% in 4Q13, but operating profit fell by 26% QoQ. The analyst believes the growth targets for FY14 are unlikely to be met due to the expected drop in condominium revenue.
• Dividend Yield: The net dividend yield is expected to rise from 5.4% in FY13 to 8.1% in FY16, though the analyst does not consider this a strong enough incentive to justify investment.
• Balance Sheet: QH has a net debt/equity ratio of 99.2% for FY13, expected to decrease to 73.9% by FY16. The company has a high level of debt, which may affect its financial flexibility.
• Cash Flow: Free cash flow is expected to decline from THB4,446.7m in FY13 to THB2,879.4m in FY16, which may limit its ability to fund growth and dividends.
• Analyst Recommendations: The analyst prefers SPALI (BUY TP THB23) and AP (BUY TP THB6.5) over QH, citing better earnings visibility and valuation.

Key Information

• Share Price Performance: Over the past 12 months, the share price has dropped by 33.2%, underperforming the market.
• Earnings Growth: QH's earnings growth has been declining, with a core EPS growth of -17.2% in FY14 and -17.2% in FY16.
• Operating Profit: Operating profit fell by 26% in 4Q13, indicating a challenge in maintaining profitability.
• Dividend Cover: The dividend cover has remained relatively stable at around 2.0x, suggesting that earnings are sufficient to cover dividends.
• Liquidity: The current ratio is at 2.8x for FY14, indicating good liquidity, though it is expected to improve slightly in FY16.
• Growth Ratios: Revenue growth is expected to slow down, with a projected growth of 37.6% in FY15 and 4.1% in FY16.

Key Viewpoints

• Contrarian SELL: The analyst believes QH has passed its prime and is not a good investment due to weak earnings outlook and valuation.
• Downside Risk: The FY14 revenue target is considered too optimistic, especially given the impact of the Bangkok Shutdown.
• Dividend Misconception: The analyst disagrees with the idea that buying QH provides access to cheap property business, noting the company has historically traded at a discount to its investment portfolio.
• Valuation Concerns: The current valuation of 9.3x P/E is not attractive compared to the sector average of 9.0x.
• Recommendation: SPALI and AP are preferred over QH, as they offer better earnings visibility and more attractive valuations.

Summary Table

Conclusion

Quality Houses is viewed as a contrarian SELL due to its weak earnings outlook, high valuation compared to the sector, and the challenges in offsetting the drop in condominium revenue. The analyst believes the company's growth targets are unlikely to be met and prefers other stocks with better visibility and valuations.