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Sansiri

2Q14 earnings beat all estimates; but major EPS dilution is ahead



Sansiri Plc (SIRI)

Above our estimate

SIRI reported a net profit of Bt538m for 2Q14, up 3% YoY but down 35% QoQ. The result was 20% above our estimate and 10% ahead of the consensus, mainly due to a lower-than-expected SG&A/sales ratio. Excluding Bt857m in net gains from the sale of Siripinyo office building to a property fund and a land plot in Phuket, core earnings would have turned around from a loss of Bt42m in 1Q14 to a core profit of Bt537m in 2Q14.

Results highlights

The YoY and QoQ core profit growth was due to a lower SG&A/sale ratio (down from 24. 2% in 2Q13 and 32.1% in 1Q14 to 20.7% in 2Q14). Residential GM rose 1.0% YoY to 33.4% in 2Q14. The ratio decline outweighed the effect of a 20% YoY plunge in residential revenue to Bt5.9bn (57% condo and 43% low-rise). On a QoQ basis, residential sales jumped 41% on backlog transference (a low base was set by 1Q14). Residential GM was stable QoQ. The net gearing ratio rose from 2.0x at end-March to 2.2x at end-June (the D/E ratio was high at 2.8x).

Outlook

SIRI will post YoY and QoQ profit growth for 3Q14, driven by top-line expansion. Residential sales are expected to jump by about 20% YoY and 40% QoQ for 3Q14. SIRI intends to accelerate backlog transference in 2H14 after cancellations eased on low-end condos.

What's changed?

1H14 core profit comprises 23% of our FY14 forecast and 21% of the consensus. We maintain our forecast unchanged, as backlogs at end-June (Bt49bn) secured 79% of our FY14 residential sales assumption. But there is downside risk to SIRI's FY14 residential revenue target of Bt33bn—the 1H14 number represents only 30% of its target (34% of our assumption).

The recap plan could mean 47% EPS dilution—7,672m new shares are to be issued: 1) a rights offering (RO) with free warrants (SIRI-W2) at a ratio of 3:1:1 (three old shares to get one new share and one free warrant) at an RO price of Bt1.30/share and 2) 300m units of ESOP#7 shares. Note that the exercise price is Bt2.50/unit for both SIRI-W2 and ESOP#7. We estimate 26% EPS dilution from the RO shares and a further 21percent from the exercising of SIRI-W2 in FY15 (if it were to be in-the-money). The recap plan will be tabled at an EGM scheduled for Sept 12.

Recommendation

We maintain a SELL rating with a YE14 target price of Bt2, pegged to a PER of 9x, 0.5SD above its FY06-13 mean). We will revisit our model and target price to factor in the recap plan (XR on Oct 7). If there were full subscription to the RO (Bt4.7bn in proceeds), we would estimate the YE14 net gearing ratio at 1.6x (still the highest of our ResDev coverage). The 26% EPS dilution from the RO would mean an FY15 PER of 15.5x against a coverage mean of 11.5x.


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