We believe that Quality
Houses' (QH) announcements yesterday of a year-end dividend
and new warrant issue (QH-W4) are net positive for the stock
over the short-term.
Since QH-W2, QH-W3 and the
soon-to-be-issued QH-W4 are all in the money, we have to
assume that all are eventually converted and adjust our fair
value accordingly. Based on full dilution and our NPV
estimate, we have downgraded our fair value estimate by 21%
from Bt13.3/share to Bt10.5. The current price still offers
a 67% upside to the revised NPV.
The other positive near-term
news is the announced payment of a final dividend of
Bt0.335/share, which represents a dividend yield of 5.3% at
the current share price.
QH's operational performance
continued to improve in 4Q02. We have upgraded earnings
forcasts for 2003-2004 by 13% and 17% to Bt798mn and
Bt834mn, respectively. The company recorded negative free
cash flow of Bt1.1bn last year, but this should reverse this
year to a positive Bt1.4bn.
We are maintaining our BUY
recommendation on QH’s shares due to the company's
attractive dividend payment, pending free QH-W4 warrant
issue and improving earnings prospects. We also advise
investors to buy QH-W2 to convert into common shares to
receive the new warrants. However, QH-W2 holders won't be
entitled to the dividend payment.
Table 1: QH's
earnings forecasts
|
Year
to Dec |
2001 |
2002F |
2003F |
2004F |
2005F |
|
Sales (Btmn) |
2,781 |
3,670 |
4,445 |
5,512 |
4,195 |
|
Net profits (Btmn) |
203 |
603 |
798 |
834 |
741 |
|
EPS (Bt) |
0.25 |
0.66 |
0.88 |
0.92 |
0.82 |
|
Growth (%) |
112% |
164% |
32% |
5% |
(11%) |
|
Cash per share (Bt) |
0.3 |
0.6 |
1.1 |
1.1 |
1.1 |
|
PER (X) |
25.1 |
9.5 |
7.2 |
6.9 |
7.7 |
|
BPS (Bt) |
2.6 |
3.6 |
4.8 |
5.4 |
6.0 |
|
EV/EBITDA (x) |
23.0 |
19.0 |
10.5 |
7.9 |
7.6 |
|
Dividend Yield (%) |
0% |
0% |
5.3% |
4.3% |
5.1% |
QH announces
dividend and free QH-W4
QH announced yesterday that
it will pay a Bt0.335/share dividend from its 2002
operations, representing a dividend yield of 5.3% at the
current price. The company will also issue 289mn 3-year free
warrants to existing shareholders and 12mn free warrants to
employees.
Each QH-W4 warrant will carry
the right to convert into one common share at Bt6 each with
the conversion at the end of every quarter. The issue ratio
has not been decided yet since the company must reserve the
right for all shareholders to receive the free warrants,
including new common shareholders from the conversion of
QH-W2 and QH-W3.
At this point, we assume that
QH-W2 warrant holders will all convert in time to receive
the new warrants since the last exercise period for QH-W2 is
this April. We, therefore, assume that 289mn QH-W4 warrants
will be issued to holders of the 908mn existing common
shareholders and the 239mn newly-converted common shares
from QH-W2 at a ratio of one warrant for every 4 shares
held.
We don't expect to see many
QH-W3 holders convert in time to get the new warrant issue
since the maturity on QH-W3 doesn't expire until October
2005. If a sizeable portion does convert, we believe the
issue ratio could be adjusted to one warrant for every five
shares held.
Table 2:
Details of QH's warrants
|
Warrant |
Conversion
Price (Bt) |
No.
(mn) |
Proceeds
(Btmn) |
Price
(Bt) |
Dip |
In/Out |
Maturity |
|
QH W2 |
5.88 |
239 |
1,402 |
0.23 |
0.19 |
In |
Apr-03 |
|
QH W3 |
5.00 |
271 |
1,353 |
2.53 |
(1.23) |
Out |
Oct-05 |
|
QH-W4 |
6.00 |
289 |
1,737 |
- |
- |
- |
Apr-08 |
|
ESOP-W |
na |
13 |
- |
|
|
|
Apr-08 |
|
|
|
|
|
|
|
|
|
Total warrant |
811 |
|
|
|
|
|
|
Existing shares |
908 |
|
New share to total |
5 |
|
Total potential shares |
1,719 |
|
New share ex QH-W3 |
4 |
QH-W2
conversion will be in time to receive QH-W4, but not for the
dividend
Investors should note that
QH-W2 holders will have no dividend rights as the XD date on
April 16th is before the registration converting
QH-W2 to common shares is completed. However, QH-W2 will have
time to convert to common shares in time for the XW right for
QH-W4. Shareholders' approval for QH-W4 is scheduled on March
20th. We expect the warrant issue process to take
2-3 months due to the Securities and Exchange Commission's
(SEC) stringent requirements on new warrant issues.
Table 3:
Schedules for QH-W2 conversion, 2002 dividend and QH-W4 right
|
Dividend
for 2002 |
Bt0.335/share |
|
XD date |
|
16-Apr-03 |
|
|
|
|
|
QH-W2
Exercise |
|
|
Last day of trading |
25-Mar-03 |
|
Intent to exercise |
4-20
Apr-03 |
|
Last day of right
exercise |
21-Apr-03 |
|
Registration period |
1 month |
|
|
|
|
|
QH-W4
Right |
|
|
Shareholder approval |
20-Mar-03 |
|
XW |
|
to be
announced |
Earnings
prospects continue to improve in 2003-2004
QH reported a 38% growth in
4Q02 earnings to Bt148mn. We are expecting to see continuing
strong earnings in 1Q03 due to the completion of title
transfers carrying forward from the previous quarter and
success of new housing project sales. According to management,
sales have remained brisk in February and March even with an
increase in average prices for pre-built houses of 3-5%.
Table 4:
Quarterly income statement
|
|
4Q02 |
4Q01 |
%
Chg |
3Q02 |
%
Chg |
2002 |
2001 |
%
Chg |
|
Sales |
823 |
988 |
(16.7%) |
1,006 |
(18.2%) |
3,670 |
2,781 |
32.0% |
|
COGs |
505 |
699 |
(27.8%) |
671 |
(24.8%) |
2,475 |
1,958 |
26.4% |
|
Gross
profits |
319 |
289 |
10.1% |
335 |
(4.8%) |
1,195 |
823 |
45.2% |
|
SG& A |
149 |
177 |
(15.4%) |
154 |
(3.1%) |
594 |
484 |
22.8% |
|
Operating profits |
169 |
113 |
50.3% |
181 |
(6.4%) |
601 |
339 |
77.2% |
|
Interest expenses |
48 |
50 |
(2.2%) |
54 |
(9.6%) |
183 |
226 |
(18.9%) |
|
Non-operating income |
50 |
(13) |
501.6% |
14 |
270.6% |
104 |
79 |
32.2% |
|
Pre-tax income |
219 |
100 |
119.3% |
194 |
13.0% |
521 |
192 |
172.2% |
|
Net
profits |
148 |
108 |
38.0% |
164 |
(9.6%) |
603 |
208 |
189.8% |
|
EPS |
0.2 |
0.1 |
23.3% |
0.2 |
(19.0%) |
0.7 |
0.3 |
158.9% |
|
Gross margins (%) |
38.7 |
29.3 |
|
33.3 |
|
32.6 |
29.6 |
|
|
Operating margins (%) |
20.5 |
11.4 |
|
18.0 |
|
16.4 |
12.2 |
|
QH's gross margins rose
sharply in 4Q02 to 38.7%, as new projects in Pharam II and
Petchakasem 69 are yielding very high margins. With overhead
costs decreasing, QH's operating margins improved from 11.4%
in 4Q01 to 18.0% in 3Q02 and 20.5% in 4Q02. We expect to see
stronger average margins this year, as new projects have
lower costs and command higher prices. Even though we have
trimmed our sales forecasts slightly, we are still expecting
to see strong earnings growth of Bt798mn in 2003 and Bt834mn
in 2004.
|
|
Original
forecasts |
Revision |
%
Change |
|
|
2002 |
2003E |
2004E |
2002 |
2003E |
2004E |
2002 |
2003E |
2004E |
|
Revenues |
3,958 |
4,664 |
6,348 |
3,670 |
4,286 |
6,321 |
(7%) |
(8%) |
(0%) |
|
Housing (Btmn) |
3,564 |
4,253 |
5,084 |
3,079 |
3,875 |
4,881 |
(14%) |
(9%) |
(4%) |
|
Rental properties
(Btmn) |
394 |
411 |
1,264 |
590 |
411 |
1,440 |
50% |
0% |
14% |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margins (%) |
31.7% |
31.6% |
31.6% |
32.6% |
34.6% |
34.8% |
|
|
|
|
Operating margins (%) |
16.0% |
15.8% |
18.6% |
16.4% |
19.6% |
22.8% |
|
|
|
|
Working capital (Btm) |
6,266 |
6,242 |
6,594 |
6,715 |
6,359 |
7,171 |
|
|
|
|
Net debt (Btmn) |
5,487 |
5,173 |
4,933 |
8,180 |
6,583 |
6,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses (Btm) |
177 |
155 |
185 |
183 |
197 |
240 |
|
|
|
|
Net
profits (Btmn) |
635 |
707 |
712 |
603 |
798 |
834 |
(5%) |
13% |
17% |
LH exercised part of its
QH-W2 warrants at the end of last year. The Bt484mn proceeds
received allowed QH to reduce its gearing to 2.52x. With an
appropriate combination of existing and new land bank, QH's
working capital rose slightly last year from Bt6.38bn to
Bt6.72bn. With the remaining QH-W2 to be converted in April,
QH will be in a stronger financial position to develop new
projects.
Table 5:
Financial ratios
|
|
Q4/01 |
Q1/02 |
Q2/02 |
Q3/02 |
Q4/02 |
|
Gearing |
3.41 |
3.32 |
3.18 |
2.94 |
2.52 |
|
Interest Cover |
2.3 |
2.0 |
4.2 |
3.4 |
3.5 |
|
Inventory Days |
1,060 |
951 |
917 |
879 |
1,007 |
|
Collection Days |
20 |
20 |
16 |
12 |
9 |
|
Payment Days |
27 |
30 |
23 |
23 |
29 |
|
Net debt (Btmn) |
6,972 |
6,951 |
7,608 |
7,670 |
7,698 |
|
Working capital (Btmn) |
5,694 |
5,746 |
6,246 |
6,380 |
6,715 |
Total backlog
of Bt17.6bn in December 2003
QH is currently developing nine
projects worth Bt10,543mn. In the first three quarters of this
year, the company is preparing to launch another six projects
worth Bt7,020mn. The The company plans to add at least three
new projects next year. This includes both housing and rental
properties.
Table 6: QH's
project details
|
Existing
projects |
(Btmn) |
New
projects |
(Btmn) |
Launching |
|
Pruekpirom (Pinklao) |
2,271 |
Laddarom Elegance |
1,500 |
1Q03 |
|
Pruekpirom Regent
(Pharam II) |
1,758 |
Laddarom Petkasem 69 |
800 |
1Q03 |
|
Laddarom
(Rattanatibate) |
448 |
Laddarom Ramkamheang |
880 |
2Q03 |
|
Laddarom (Pinklao) |
2,212 |
Pruekpirom Kaset |
1,640 |
2Q03 |
|
Laddarom (Chiang-mai) |
493 |
Lasalee |
1,400 |
2Q03 |
|
Vararom (Petkasem 81) |
1,129 |
Chiangmai |
800 |
3Q02 |
|
Vararom (Suwintawong) |
36 |
total |
7,020 |
|
|
Vararom (Teparak) |
1,013 |
|
|
|
|
Vararom (Thonburirom) |
1,183 |
|
|
|
|
Total |
10,543 |
Grand
Total |
17,563 |
|
|
Income
statement |
|
(Btmn) |
2001 |
2002E |
2003E |
2004E |
2005E |
|
Sales |
2,781 |
3,670 |
4,445 |
5,512 |
4,195 |
|
COGs |
1,958 |
2,475 |
2,907 |
3,596 |
2,503 |
|
Gross
margins |
823 |
1,195 |
1,538 |
1,916 |
1,692 |
|
SG&A |
477 |
594 |
667 |
661 |
650 |
|
Operating
margins |
346 |
601 |
871 |
1,255 |
1,042 |
|
Interest expenses |
226 |
183 |
197 |
240 |
150 |
|
Other income |
72 |
104 |
102 |
122 |
113 |
|
Pretax profits |
192 |
521 |
776 |
1,136 |
1,005 |
|
Income taxes |
- |
- |
- |
341 |
301 |
|
Associate Earnings |
(40) |
(2) |
22 |
38 |
38 |
|
Minority Interests |
- |
- |
- |
- |
- |
|
Extraordinary Items |
50 |
84 |
- |
- |
- |
|
Net
income |
203 |
603 |
798 |
834 |
741 |
|
Balance
sheets |
|
(Btmn) |
2001 |
2002E |
2003E |
2004E |
2005E |
|
Cash equivalent |
320 |
481 |
995 |
568 |
466 |
|
Receivable |
150 |
85 |
170 |
196 |
172 |
|
Inventories |
5,687 |
6,824 |
6,355 |
7,201 |
5,835 |
|
Investment |
231 |
461 |
461 |
461 |
461 |
|
Fixed Assets |
3,364 |
3,261 |
3,267 |
3,216 |
3,160 |
|
Total
assets |
10,354 |
11,945 |
11,538 |
12,070 |
10,452 |
|
Credits |
143 |
195 |
167 |
227 |
165 |
|
ST-debts |
1,174 |
2,786 |
3,614 |
1,436 |
1,711 |
|
LT-debts |
5,549 |
5,394 |
2,969 |
4,975 |
2,566 |
|
Other
liability |
1,352 |
324 |
324 |
324 |
324 |
|
Equities |
2,136 |
3,247 |
4,464 |
5,108 |
5,687 |
|
Cash
flow statement |
|
(Btmn) |
2001 |
2002E |
2003E |
2004E |
2005E |
|
Net Profit |
203 |
603 |
798 |
834 |
741 |
|
Depre./Amort. |
181 |
107 |
202 |
209 |
214 |
|
Net Working Cap. |
432 |
(1,022) |
356 |
(812) |
1,328 |
|
Unrealized F/X |
10 |
- |
- |
- |
- |
|
Cash
flow from operations |
239 |
(1,103) |
1,623 |
230 |
2,284 |
|
|
|
|
|
|
|
|
CAPEX |
(56) |
5 |
(200) |
(150) |
(150) |
|
Investment |
(22) |
6 |
- |
- |
- |
|
Cash
flow from investing |
(65) |
1,103 |
99 |
(150) |
(150) |
|
|
|
|
|
|
|
|
Debt Movement |
(716) |
572 |
(1,597) |
(171) |
(2,135) |
|
Capital Call |
1,020 |
1,070 |
480 |
- |
- |
|
Dividend Paid |
- |
- |
(304) |
(450) |
(522) |
|
Cash
flow from financing |
(161) |
(54) |
(1,237) |
(421) |
(2,358) |
|
|
|
|
|
|
|
|
Free
cash flow |
183 |
(1,098) |
1,423 |
80 |
2,134 |
|
Financial
ratios |
|
|
2001 |
2002E |
2003E |
2004E |
2005E |
|
Gross margins |
29.6% |
32.6% |
34.6% |
34.8% |
40.3% |
|
Operating margins |
12.5% |
16.4% |
19.6% |
22.8% |
24.8% |
|
Net gearing |
3.41 |
2.37 |
1.25 |
1.14 |
0.67 |
|
Interest coverage |
1.9 |
3.8 |
4.9 |
5.7 |
7.7 |
|
Inventory Days |
1,060 |
1,007 |
798 |
731 |
851 |
|
Collection Days |
20 |
9 |
14 |
13 |
15 |
|
Payment Days |
27 |
29 |
21 |
23 |
24 |
|
