4Q02 results slightly below expectations

SUPALI announced yesterday a 78% yoy decrease in 4Q02 earnings to Bt47mn. Even if we exclude last year's extraordinary losses and 2001's extraordinary gains, SUPALI's 4Q02 normalised profits of Bt62mn were still slightly below expectations.

Despite the earnings recovery expected this year, we still believe that SUPALI's prospects are inferior to some of its peers. First, since only around 15% of SUPALI's housing sales are pre-built, the company's revenue recognition and cash conversion are slower. Second, financial risks are higher as SUPLAI's net debt-to-equity ratio remains relatively high at around 1.6-1.8x. Third, margins should be thin as SUPALI has not made full provisions for reduction in land values, like its competitors. For example, the company revalued its flagship condominium project up by 29%.

We have raised SUPALI's NPV estimate up 9% from Bt2.3/share to Bt2.5, due improving earnings in 2003-2004. However, the stock already looks fully valued, trading at only a 5.3% discount to our NPV estimate. Furthermore, some investors have lost interest in SUPALI's shares due to the delay in SUPALI's planned warrant issue. Also, there are a number of more attractive developers in the market, such as LPN, LH, NOBLE, PF and QH, all of which offer at least a 35% upside to NPV.

Normalised profits turn around in 2002 and should further improve in 2003

In 4Q02, SUPALI's normalised profits turned around from a loss of Bt36mn to a profit of Bt47mn. For the full year, normalised profits came in at Bt163mn, versus a loss of Bt185mn in 2001. Strong pent-up demand in housing market boosted revenues and widened margins, while financial expenses declined by 43% due to successful debt restructuring and lower interest rates. The company booked net extraordinary gains of Bt786mn last year with most of the items related to debt restructuring. The management expects no further exceptional items this year.

After big improvement in 2002, debt position expected to remain stable this year

Strong housing sales have allowed SUPALI to reduce its net borrowings from Bt4.4bn to Bt3.2bn at the end of last year, as virtually all land sales were from existing land bank. Since the company had only around 15% of its housing sales on a pre-built basis, we believe SUPALI will need to raise working capital this year to compete in this market, as well as finance the completion of its Bt1.2bn flagship condominium Supalai Park Phaholyothin III. We are forecasting net debt to go up slightly to Bt3.7bn by the end of this year. Although the company's debt to equity was around Bt1.8x in 4Q02, we believe business risks are relatively controlled at this stage.

2004 earnings forecast lowered by around 10%

We have fine-tuned our earnings forecast for 2003 to Bt317mn but reduced 2004 earnings by around 10% to Bt329mn. We have raised revenues by 5-6% but downgraded margin forecasts around 1-2%. The company made only 5% provision on loss in land value against the 15-40% provision made by other developers. In addition, SUPALI raised the value of its Phaholyothin place around Bt345mn or 29% of the total investment value. The company's margins are expected to be under pressure if pricing in the industry deteriorates later in 2004. After these adjustments, SUPALI's normalised profits are expected to grow 106% in 2003 and 4% in 2004.