Shares of a mid-market catering property developer, L.P.N. Development Plc (LPN) surged 13 per cent during the early morning trade as media reports suggested that the company was a possible target for a takeover.
Shares of LPN, which has been heavily impacted amid the sharp slump in the demand for property in Thailand and around the world, has so far risen just over 80% so far this month alone, against the likes of Land & Houses Plc (LH), a much larger and more cash-rich company, which has seen its shares drop by 3.38% over the same period.
Year-to-date shares of LPN has risen by 47.26% in a market where demand, revenue and profitability of the all, including LPN’s own, has seen a decline of more than a third of what it had seen during the same period of last year.
On the other hand, companies such as LH, which has a wide array of assets and is far more diversified, has seen its shares dive by more than 37% year-to-date. LH has interests in another real-estate developer – Quality Houses Plc., a home furnishing firm Home Products Plc (HMPRO), financial firm LH Financial Group Plc (LHFG) and a non-listed retail outlet – Terminal 21 that has outlets spread all across the country.
Reports in a local stock newspaper – Khao Hoon, reported on the front page today that LPN was a target of a takeover by a group of investors lead by those who own Noble Development Plc (NOBLE) and that these investors plan to accumulate the shares of LPN overtime before they make a tender offer for the remaining shares of LPN.
The news report has prompted the shares of LPN to be one of the most active stocks on the SET with close to 200 million shares changing hands as of mid-day break on the SET at 12:30 pm.
Realities on the Ground
The impact of the coronavirus on the country has been like one never seen before, demand for all goods and services have fallen sharply be it household items all the way up to vehicle sales that are predicted to decline by as much as 50 per cent in 2020 from the more than 2 million vehicles seen during 2019.
The government on its part in the middle of discussing the 1.9 trillion baht loan and a stimulus package that could help restart the economy and to top it off Thailand is currently facing one of the worst unemployment rates in decades.
The Ministry of Labour has already stated that the number of unemployment claims that it is receiving on a weekly basis is far beyond what it is capable of handling.
Some of those seeking the unemployment benefit are those that are the target customers of LPN where the unit cost of a condominium starts from just over a million baht and goes up according to the area the projects are located in.
To put in context, the only last week the Real Estate Information Center (REIC) came out to give its assessment of the current situation in the real estate market which is set to decline by at least 15-17 per cent due to the impact of the coronavirus.
Vichai Viratkapan, the acting director-general of the REIC, came out to say that “the market will nosedive this year” after having predicted earlier in 2020 for the market to see a 3-4 per cent growth.
REIC said that the number of units expected to be transferred is set to be a mere 311,719 down nearly 17 per cent year-on-year, while the prediction of the value of transfers is et to be at 747 billion or a decline of as much as 15 per cent year-on-year.
REIC revealed that during the first quarter of 2020 the number of units transferred was at a mere 89,024 units down 16.7 per cent from those seen during Q4 of 2019 but up 2.5 per cent year-on-year with the total value of 210 billion baht.
Bangkok, which is the usual concentration for LPN, saw the ownership transfer number declined by 18.3 per cent quarter on quarter and 4.4 per cent year-on-year, to 45,678 units. In terms of value, the decline was far steeper – 24.45% quarter-on-quarter and 2.7 per cent year-on-year, decline to 129.41 billion baht.
The REIC said that Bangkok will see 160,350 residential units which would be a decline of 19.1 per cent year-on-year with the value being just over 472 billion baht or a decline of 17.4 per cent year-on-year.
LPN’s Q1 Results
The situation at LPN is not that rosy either as the company reported a sharp decline in its profitability during the first quarter of 2020.
In its Management Discussion & Analysis (MD&A), which is basically the dissection of the overall earnings and expenses of the company, LPN said that its profitability during the first quarter of the year saw a 38.03 per cent decline as its sales dropped by as much as 40.08 per cent.
The company, however, said that is gross profit margins of just over 30 per cent remained intact. Although year-on-year the net profit margins have gone down to 11.72 per cent from 12.41 per cent seen during Q1 of 2019.
The company said that it has cash and cash equivalent of about 962 million baht which was a rise from 501 million baht as of the end of December 2019, but it also had a backlog of more than 10 billion baht which was up from 9.4 billion baht as of the end of December 2019.
To give a clearer picture of the company’s standing, LPN reported that its ‘Inventory Turnaround Ratio’ was at 841.78 days a 97.38 per cent increase from 426.47 days as of Q1 of 2019. This means that the company needs double the time to clear out its inventory than it had just a year ago.
Although the company’s Debt-to-equity ratio remains low at 0.90:1 against 0.70:1 in Q1 2019, the outlook for the company remains not so rosy as there is a possible supply glut in the market and more units are to come to the market as more projects are completed over the course of 2020.
Demand, on the other hand, is likely to shrink and financial institutions are set to be more stringent in their lending to the customers as economic outlook looks bleak.
The Bank of Thailand has already said that the country’s economy could shrink by as much as 5.3 per cent from the impact of the virus.
The tourism industry, a key component of the economy is already expecting to see the number of tourists falling to levels not seen in years after nearly reaching 40 million tourists during 2019.
Share Buyback and Special Dividend
Amid all this LPN decided to announce that it was undertaking a payment of ‘special dividend’ which it announced last week.
The 1-baht a share in special dividend was also followed by the company announcing that it was looking to use as much as 500 million baht to repurchase as much as 126 million shares in the company. This would equate to 8.54 per cent of the total paid capital of the firm.
The company will purchase the stock with the price premium not higher than 15 per cent of the average closing share price of five business days prior to each repurchase date.
Referring to its latest financial report, LPN has a book value of 8.68 baht, compare to pre-announcement average stock price of 3.88 baht which translates to a price-to-book around 0.44x
The company has sufficient liquidity to complete the program as it has a combined value of cash-on-hand and inventory value of around 2 billion baht.
While these transactions will reduce LPN’s equity base and thus raise its interest-bearing debt to equity ratio, analysts see that LPN’s balance sheet remaining strong. In the case, it can complete all of these transactions, based on Kasikorn Bank’s current earnings forecast they see its interest-bearing debt to equity ratio at the end of 2020 rising from 0.63x to 0.75x.
In terms of cash flow, Kasikorn Bank believes LPN will have enough liquidity to complete these two transactions. At the end of 1Q20, LPN had cash on hand of 962 million baht plus 3.75 billion baht of backlog to transfer over the remainder of 2020. Also, it has unsold inventory with no debt obligations of 12 billion baht while it has only 1.0 billion baht of interest-bearing debt to repay in the next six months.
The company also has said that it has retained earnings of 9.765 billion baht.
Our Opinion
Despite the bleak outlook of the industry, LPN can be viewed as a value play. One thing to note here is its sustainable record of paying out dividends. The company paid out no less than 0.60 baht per share as its annualized dividend since 2018.
Even before the announcement of paying an extra dividend of 1.00 baht a share. It translates to a dividend yield of +10 per cent (0.60 baht against the stock price of 6.00 baht).
After the announcement of the extra dividend and shares repurchase, the stock price has moved up around 2.00 baht, equivalent to 50 per cent from prior to the news. We view that, given the strong run, LPN hasn’t had much upside left in terms of price appreciation since we think the company will not buy any shares should the stock price values above 4.50 baht.
Post the extra dividend payout (of 1.00 baht), we think that the company will switch back its dividend payout of around 0.60 baths per annum. Coupled with the dimmed outlook in the sector, we think the stock price would be traded around 6.00-7.00 baht in the longer run. At that range, it will have an expected dividend yield of 10 per cent with multiples of 0.7x its book value, which seems fair in our opinion.
We, therefore, recommend investors to hold on until the XD date – June 5 (the date that the dividend is paid out) and suggest to divest the shares after the XD date as the outlook of the industry remains bleak and recovery is not expected until late 2021 or 2022.
