PRIN, the undervalued and misunderstood.
"The best investment returns are often found in some of the darkest corners of the world" David Swensen
A misunderstood and under-analyzed company. PRIN is a classic turnaround situation for year 2010-11. I rate it with a solid "Buy view", especially as the SET market weakens a bit now due to yesterday’s global sell-off and into late Februay due to Thai politics. If PRIN dips below 2 Baht, possible today, I dare rate it with a strong buy view.
PRIN (2.04) has been a property selection of mine for the past few months. PRIN is also a selection in my latest currently running model portfolio. While the SET has dropped some 5% since posting it in the model, PRIN has held its value well.
You can see my latest running model at this link:
Just a reminder:
A model portfolio is just that, a simple model. It’s only fairly close to the real thing as I fine tune things regularly beyond that as I get more insights into a company, market sentiment, global markets and/or new ideas. Some of my added value performance enhancers are trading around winning positions. These obviously I cannot constantly report here nor, all account for. If I had to do all this I would become a full time arm-chair investor, but I am not; I am a real investor. There are exceptions of course, but I fairly regularly perform better then the model for these and other reasons.
Today for members I want to review some of the basis why I like PRIN, this post my visit to them a month ago.
First realize that PRIN is one of the "top ten" listed property developers listed on the SET. It features probably last on that list, and so is #10. Its also by a good margin the least valued of any of them, this when we view the price to book, the p/e ratio and the likely current dividend yield. It’s the least valued of any for 2 key reasons:
1) Small is always cheap here and 2) the company just came out of some set backs as is explained below but about which not many have a good understanding.
Here is how Bualuang just describe PRIN in its January buy report:
"PRIN’s ability to raise its sales prices signals that its profitability is improving and its competitive advantage is increasing. Note that its earnings are now the highest they have been since 2004. The implication is that if PRIN can achieve its FY10 targets, it will join the ranks of the first-tier developers—LH, PS, QH, AP, LPN and SPALI. The firm currently trades at a YE10 PBV of only 0.6x, a steep 45.5% discount to its long-term mean of 1.1x (subsectoral average PBV of 1.9x). The stock is very cheap".
PRIN focuses on middle income Thai’s and that is for residential properties. Not expensive condo’s to the expats, or shopping centers or plush hotels. Its very focused on what it does and not about to change! Prin uses Tunnel Form Technology, this method boost gross margin by 5-8% and just as importantly reduce the time required for construction to four months from eight months all while maintaining a high quality standard. PRIN is also developing a new construction method for SDH projects to increase the GM of new projects to 30%.
Some info on "New Form Tunnel Technology":
Because PRIN focuses only on Thai customers, their web site is only in the Thai language. But they agree it would be better if its in English as well and plan to have this in place within a few months. You can see their Thai language web site at: www.prinsiri.com
The company was IPO’d at 2.80 in year 2005 and the Kovitchindchai family (insiders) own 76% of this company. Their present D/E ratio is below 1 and the lowest in their industry. The company reported 728 mill. Baht in pre sales in the 4Q of ’09. You can see their financial highlights at this link:
I noticed Morgan Stanley is listed as their 7th largest shareholder owning 3% of the outstanding shares. (As of the last book closing date last March 2009). The company states it has over 1000 shareholders. Morgan Stanley, my former employer, is known for picking undervalued secondary stocks around the globe, with some astuteness.
As has been reported the company decided in 2008 to retain a professional management team lead by K.Verra which came from PS, the leading most successful Thai property developer in Thailand.
PRIN suffered financially in FY07-08. The firm then brought in a financial expert as the MD, Mr Veera Srichanachaichok.
Mr. Veera was formerly deputy MD of Finance and Accounting at PS. Although he joined PRIN in Sept 2008, he has succeeded since 2Q09 as evidenced by operating profit growth of 29.2% YoY and 215.7% QoQ.
PRIN’s management team is new but experienced and professional! The company appointed Mr Suriya Wannabuit as a deputy MD. We expect Suriya will run PRIN’s SDH projects, as he was formerly MD of Piwattana Co Ltd, (a SIRI subsidiary).
PRIN is now renovating its brands for SDHs and THs. (Single detached house and Town Houses). The new brands to be launched soon are Six Nature (to replace Prinyada and Prinyaluck), Baan Prin and Baan Prinsiri. PRIN’s key mission is Bt10bn a year in sales, which would make it one of Thailand’s top-five residential developers by revenues, and to build gross margin and net profit margin to not less than 30% and 12%, respectively.
Company explanation as to what went wrong with their first experience with Condo’s:
In 2009 this company launched 5 Condo projects, 1 was completed last year and 4 will be this year. Previously the company did not have any condo experience and so got taken by this lack of. A low rise condo project around Bangkok has a height restriction but this was never much enforced in the past. Many of their customers asked for higher ceilings -and so the company complied so to please their clients.
Just then some political figure made a fuss about the lack of enforcement of height restriction (for the first time as I understand), and PRIN was so forced to refund the customers money, shave off the top floor and delay the opening. Three major events which dented the profit margin. The company being sensitive to its customers complied on all issues and was very accommodating to their clients yet, its profit margins suffered. The company worked hard to satisfy it clients so to maintain a good reputation.
The company clearly told me after explaining this "we so had some legal issues but now these are now solved".
However and to their benefit, in 4Q09 PRIN increased the average sales prices for one of its condominium project to Bt55,000/sqm from Bt42,000, boosting gross margin to 28% for 4Q09 and nearly 23% for FY09. So profitability on this project will now rise nicely.
The four existing condos are on schedule: The Bridge Paholyothin 37 (to be transferred in early Feb; the average sales price for unsold units has increased to Bt55,000/sqm from Bt42,000), the Complete Narathiwas (to be transferred in 2Q10), Smart Condo @ Rama II
(be transferred in 3Q10; the BOI has waived corporate income tax for 85% of its 2,062 units) and the Pride Pattaya Sai 2 (Tower B) are to be transferred on time
Yet, Townhouses (TH) are the company’s core profit drivers and PRIN plans on launching 5 new projects over the next 3 Quarters. Construction time and cost of these are reduced due to the tunnel from technology mentioned above. The company believes year 2010 will see 50% condo sales and 50% other revenues (SDH & TH).
The company gives guidance of around 5.5 billion of revenues this year 2010. Revenues were 4.3 Bill in 2008 and 3.98 Bill for the first 9months of 2009. I expect around 560 mill in revenues in the 4 Q, for a total revenues of 4.55 Bill for 2009.
Net profit for 2009 is expected around 500 mill and 550 mill for this year 2010. The Bualuang analyst projects PRIN to earn 562 mill. this year and jumping to 670 mill.in 2011. My own projections are a bit more tame at 0.56 for this year and 0.65 Earnings per share, for calendar 2011.
You can see this company is so trading at a p/e of only 3.6 for this year dropping to 3.1 for next. I expect the dividend to be 0.20 for 2009 years operation so yielding just about 10% on the current stock price of 2.04. I can see the dividend moving up to 0.22 next year or for yield of just about 10.8%. I understood that the dividend for last years’ operation will be announced by mid February, or in just a couple weeks.
There are 1.005 Bill. shares outstanding and the company states it dividend pay-out ratio is about 40% of net profits. Unlike LVT, this company attends the SET opportunity day every quarter. The book value is at 3 Baht per share, which make PRIN trade at the 2nd lowest in its industry. But at that, their book value is well understated.
The book value is understated at that as the company owns 2 very valuable plots at a very low cost price then what is shown in PRIN's stated book value. Yet, market prices on those plots are in fact combined now multiple times higher in price, so their low book value of 3 Baht value is in fact an understatement, to my estimate by around 500 mill., as I was explained. So add 0.50 Baht per share, since there are 1 bill. shares outstanding. One land plot they own is 16 Rai located near the ocean on the way to Hua Hin, its cost is 19 mill., and worth at least 400 mill. The other is 26 Rai in Pattaya showing at cost at 350 mill but worth around 500 mill. These 2 land plots are longer term holdings and not likely to be developed or sold in the next couple of years.
The company has conservative accounting which means it only recognizes revenues when the property transfers to the new owner/client. Unlike some other firms which use the % of completion method.
Why then is PRIN so cheaply valued on the SET?
1) Confusion in the market place as to what happened with their "condo problems" and few brokers willing to research this company –all due to their smaller market cap.
2) Most investors don’t understand about the future and PRIN’s solid & sensible plans to stick to what they do best, which is not glamour condo’s at the center of Bangkok.
3) Concern about the pre-sales, the government transfer tax extension issue (SBT), in fact in all the projections we assume it will not be extended, if it does net profit margins will rise.
Should their require, this company enjoys the same good bank financing terms like LH and PS, the giants in the industries.
I saw all the brochures of their different projects, visited their professional office in a modern Bangkok office tower and had a good feeling with the VP family member I met-up for over 2 hours. I like this PRIN Thai domestic story especially to compliment the two other export choices of HANA and STPI. Of course, always diversify your stock portfolio.