Target price : Bt3.40
Recommendation : BUY
Closing Price (12 May 09) : Bt2.88
Better-than-expected gross margin in 1Q09
- SPALI posted a strong net profit growth of as high as 212% YoY and 157% QoQ in 1Q09.
- Backlog is enough to drive profit growth in 2010-11 though condo sales
account for 95% of the backlog. Conservative policy toward condo development and sales would lower the risk of condo backlog. However, condo developments would keep D/E ratio high.
- In view of historical P/E ratios, we still see some valuation upside. Backlog should support growth. We keep a BUY rating on SPALI with a price target of Bt3.40/share.
1Q09 profit up as high as 212% YoY and 157% QoQ
SPALI posted a strong profit of Bt541m in 1Q09, up as high as 212% YoY but down 157% QoQ. The Bt1.3b condo transfer of River Place Charoen Nakhon and the realization of low-rise housing sales from the backlog helped SPALI to realize revenue of up to Bt2b in 1Q09 against Bt1.5b and Bt981m in 4Q08 and 1Q08 respectively. Margins of above 40% in the River Place drove the blended margins higher both QoQ and YoY. Strong revenue growth and better margins pulled 1Q09 profit higher both QoQ and YoY. The overall operating performance beat our expectations in terms of margins. We therefore raise our 2009 profit outlook by 12% to Bt1.5b or Bt0.90 a share.
Backlog enough to support earnings this year and next
At end-1Q09, SPALI had a backlog after revenue realization in 1Q09 of Bt13.5b, of which Bt4.6b, Bt5.4b and Bt3.4b would be realized as revenues in 2009-11 respectively. Given a backlog of Bt4.6b to be realized as revenues this year and 1Q09 revenue of Bt2.0b, SPALI would already have revenue of roughly Bt6.5b on hand this year. To meet the target, the rest should come from projected presales of Bt1.5b or Bt500m a quarter in 2Q09-4Q09. We expect SPALI to realize revenue of roughly Bt800m from presales in 2Q09-4Q09. Overall, we anticipate SPALI to realize revenue of Bt7.3b this year, up 22%. Margins should be slightly better than last year. Strong margins in the River Place and Park Srinakarin condo projects would be the driver of margins. For the whole of 2009, we estimate SPALI's 2009 net profit to be about Bt1.5b, or Bt0.90 a share. We also expect SPALI to distribute a dividend of Bt0.30/share.
SPALI would have a backlog of Bt5.4b carried into next year and projected presales of Bt1.4b during 2Q09-4Q09 to realized as revenues in 2010. We also expect SPALI to realize revenue of Bt1.5b and Bt1b from low-rising housing sales and condo sales in 2010 respectively. There are five condo projects to be transferred in 2010 with the remaining sales value of Bt2.8b. All of the condo projects have a take-up rate of over 80% except the Bt2.8b City Home-Ratchada-Pinklao with a take-up rate of 41%. Overall, we forecast SPALI to deliver revenue of Bt9.3b in 2010, up 27% from an estimated Bt7.3b in 2009. Strong revenue growth would offset the impact from the end of the government's property tax measures with reductions in specific business tax and transfer fees, which are unlikely to be extended. Margins would get squeezed, as margins in the condo projects are not as high as condo projects to be transferred in 2009. We expect SPALI's 2010 profit to be close to the 2009 level.
Though condo sales represent up to 95% of the backlog, we believe the company's policy that condo cannot change hand until transfer of ownership would prevent speculative buying. We therefore do not expect condo backlog cancellations but we are more concerned about sales as four existing projects have a take-up rate of 32-45%, accounting for 32% of the recently launched condo portfolio.
Valuation & Recommendation
Backlog is enough to support growth. At current P/E ratio of 3.20x, we see some valuation upside from historical average trough valuation of 4x. However, shares of SPALI normally trade at a P/E discount from its peers (4-7x against 5-8x). The discount reflects much of its backlog coming from condo projects, which have huge development costs and high D/E ratio, and low trading liquidity. SPALI had one-year historical average trading volume of Bt17m/day compared Bt100m for QH and LH and Bt25m-Bt60m for AP, PS and LPN. We keep a BUY rating on SPALI with a price target of Bt3.40/share.
By Phillip Securities (Thailand) Plc. on May 13, 2009
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