Investment Analysis of Pre-Built Public Company Limited (PREB)

Investment means spending money to realise future profits and investing in stocks is another way of spending money to realise future profits.[1] A prospective shareholder needs verifiable financial information before investing in any companies’ stocks on the stock exchange. The stock holding, or stock remains a profit-making mechanism of long-term savings. That is, individuals’ money is invested in a business and the Return on the Investment (ROI) includes both the capital gain (loss) and dividends.

This paper will analyse a Thai stock, Pre-Built Public Co., Ltd. (PREB), a medium size full-service high-quality construction company traded in the Stock Exchange of Thailand (SET). 

PREB Company Structure before 2018

[2]

PREB used to have two 100% own subsidiaries.  They are           

            1) PCM, a Construction Material Production and sales business.

            2) BL, a real estate business (sold out in 2017)

However, PREB sold BL, its investment in the real estate business, in 2017 after receiving a good offer from its former president.

Built Land (BL a subsidiary company of PREB during 2013-2017). Built Land had achieved success in completing seven property projects. However, there are land acquisition policy disagreement among top managements of BL in 2017 whether;

1) to buy expensive lands near mass transit and develop project which can be sold out faster to mid and lower-high income earners segment or

2) to buy cheaper lands further away from mass transit that take longer profits gestation, targeting grade C customers; lower-mid income earners.

Management who is the major shareholder leaned towards the expensive land choice, resulting in the disposal away BL to its former president to end the policy conflict.[3]

PREB recorded a THB 288 million profit and received cash of almost THB 1.8 billion (including related payables) from such transaction.[4]

PREB's Present Company Structure

1.1 Pre-built (PREB the parent company). PREB as a construction services company. PREB was first traded on 02 December 2005.  PREB has experience in construction of high-rise buildings of more than 50 floors.  Half of the backlog on hand is from old customers, which believe in the quality and timeliness of its work. PREB has a good dividend yield and ROE which is above the market. They paid a dividend of 1.8 Baht per share for the 2017 performance (0.80 Baht from normal profit and 1 Baht per share from the extra profit from BL disposal).[5] The financial activities in stocks purchasing had proved a point ‘why should people invest in your stock’.

1.2 The PCM Construction Material (PCM, a subsidiary company of PREB).  PREB holds 100% of PCM, which is a construction material company meaning PREB can cut some of the material cost through this.

1.3 Pre-Built Holding Co., (PBH, a subsidiary company of PREB). PREB also holds 100% of PBH (the new property development subsidiary after disposal of Built Land). In early 2018, PREB set up a new 100% own property investment business subsidiary PBH (Pre-Built Holding) with a new property investment policy.  PHB will invest in property development projects in either one of the following 2 investment models.

1.3.1. IS AM ARE Co. Ltd (IAA, a 100 own subsidiary of PBH). The IS AM ARE Co. Ltd (IAA) is developing 3 property projects.  They are Sukhumvit 26, Sukhumvit 24 and Bang Wak.  Whenever PBH acquired a potential land plot by itself, IAA will be the property development arm for PBH. 

or

1.3.2 40-49% own - Joint Venture (JV) JV projects will be the project where JV partners had identified and acquired a potential land plot and looking for construction services partner PBH will evaluate the potential of the land plot and term of the potential JV.  At the moment, there are 3 JV partners in 4 projects.  The first 2 partners are PREB's customers who were happy with PREB construction services.  The third partners were a group of Japanese property developers who are looking for Thai construction services partner[6]. PBH owns 40-49% of the JV projects and manage only the construction services part of the JV projects and let the experience developer partner manage the land selection, product design and marketing sides. Overall value around THB 4.343 billion for self-development projects and TBH 5.234 billion for JV projects (will be shown on the Q3 project summary below. PREB's share of the JV projects are 2.51 billion baht.  Lands for all the projects had already been acquired as of Q3 2018.

PREB Analysis

This paper will analyse PREB stock as a company consists of only 2 separate businesses.  (PCM the construction material Production and Sales will be imbedded in PREB in this analysis).  They are

1) Construction services (PREB+PCM) in the construction services sector

2) Property development (PBH) property development sector

This paper will analyse the sensitivity studies when each of the 2 main businesses achievement is varied to see how risky each business is. why people should invest in your stock.

2.0. SECTOR OUTLOOK

Since

PREB is a construction service company while its subsidiary PBH is

a property developer.  This paper will investigate 2 industry sectors.

2.1 Construction services sector

2.1.1 Mass Transit Effects on Construction Sector Outlook

The paper considered the overview of the mass rapid transit (BTS and MRT) master plan in Bangkok metropolitan as of July 2018. This consisted of a service 69.06 miles (20.62%), engaged the under construction of 112.68 miles (33.64%), with a future plan of 153.17 miles (45.74%).[7]

This would result in a total service of 334.91 miles, which will make it larger than the London Tube (250 miles) 1 resulting in a massive city expansion, which will then provide PREB with opportunities to acquire targeted lands for construction projects and also projects from customers, which is what the first 69 miles and the under-construction part has shown to provide. It is predicted that the mass transit in Bangkok after completion will potentially be bigger than the Tube.

More than two-thirds of the construction services projects of PREB is high-rise condominium close to the mass transit meaning that the expansion of mass transit will increase the number of high-rise construction services demand for PREB's services in the next few years.

The mega construction of the rails and the mass transit systems will attract all major construction service companies.  PREB does not participate directly in rail construction but PREB will be get indirect benefit from the much less competition in the high-rise construction services due to capacity constraint (demand > supply).

2.2. Construction Contractor Industry

Since PREB is not only just providing construction services but also a property developer, we will be looking into both industry in this sector outlook section. Top 4 main construction contractors in Thailand has now gone to focus on infrastructure (e.g. Mass Transit rail expansion) rather than property development meaning there is higher demand than supply for contractor. Furthermore, the fact that there are less competitive contractors who are willing engaged in property development projects that will create room for the award of cheapest contract proposal.

Not only the increase in number of possible projects for PREB, PREB also has one of the highest profit margins amongst contractors since most project received are done by agreement rather than bidding due to lack of big and reliable contractors who are willing to work on property development, most of these clients would not go for the cheapest contractor.

The construction services sector had contributed 8.4% of Thailand’s GDP over the years.[8] The construction sector is split into two sectors; construction for public and private sectors at the ratio of approximately 57:43. Although, the public construction experienced a downfall in 2017, the private construction grew by 0.4% in 2017.[9] The graphic illustrations shown in the graph below indicated that PREB invested more in private construction than public construction.[10]

Public construction shank in 2017, however on the private construction grew by 0.4% in 2017 shown in the graph below which in this case PREB is mostly doing private construction.

This figure above portrays the Dividend Yield (%) of the stock PREB being to highest comparing with the other 20 stocks in Construction Services industry.[11]

2.3. Property Development industry

FACTS/numbers on PREB comparing to market….

On the other hand, PREB has a competitive edge when compare to other property developers due to the fact that they do not need construction services since they have their own construction team resulting in being able to lower its cost.

2.3.1. Effects of mass transit expansion to Property Development industries:

It will increase the number of projects and targeted more lands for PREB as the mass transit systems expands its operations.

The private sector construction is forecast to likely be growing in the next decades. Over 2018-2020, investments in real estate,[12] especially in condominiums, hotel and service apartments

Both a growth in PD and CC is above GDP

[13]

[14]

[15]

2.4. Effects of Economic factors to sector

• The fixed interest rates . The UK interest rates have risen while the interest rates remained fixed for some time in Thailand. This therefore constructors and buyers won't be affected in the near future.

• Favourable trade policy. The Thailand Central Bank had pegged the policy rate at 1.5% since 2015 without any increased.

3.0. Fundamental Analysis

From the Profit and Loss Statement below, Construction business and PCM for 9 months 2018 has net profit of THB 344 million compared to net profit of THB 295.29 million for the whole year 2017 due to a higher gross profit margin in both absolute value and % gross margin.  due to both PREB's quality and on time construction services and the growing demand of construction while quality construction contractor supplies are limited[16].  The upward trend of PREB's gross profit margin and net profit margin looks promising.

-GM (Gross Profit Margin) of PREB + PCM is 20%, around 25% higher than the last three years.

-net profit of PREB + PCM is 11%, is around 40% higher than the last three years.

The estimated income and gross profit is projected to increase predominately, since the PBH revenue will be realised from 2019 onwards because revenue of a property developer can only be realised after the project is completed and transferred to customers[17]. PBH started realising revenue from 2019 onwards.

Gross profit of the whole company is 16.8%, 18.7% and 19.7% in 2019, 2020 and 2021 accordingly.

Projection revenue of PHB as projected, THB 745 million in 2019, TBH 2,031 million in 2020 and TBH 3,421 in 2021. This is a growth of 172.72% and 68.46% in 2020 and 2021 accordingly. All the lands for these projects are successfully acquired and is now in the process of construction. An example is one of the JV projects at Senanikhom, low-rise condominium (THB 1429 million), and 100% sold.

detailed of amount of estimated income from each company, PREB, PCM and PBH

4.0. RISK ANALYSIS (Quantitative & Qualitative)

4.1. Quantitative

IBDE (interest bearing debt equity ratio) for PREB's construction contractor business was zero, see the Statement of Financial Position below with 0% on 2017-year end. (quarter 1 result presentation set.or.th) (after sold BL), because demand for construction is so much more than the quality supply leading to PREB being able to ask for advance money from client before even starting the project (progress payment) without having to pay for interest lower IBDE means lower risk[18].  Previous positive IBDE is due to the PREB's previous property development business which PREB has terminate in second half of 2017.  PREB's construction contractor business is very healthy from the IDBE point of view.  Debts show in its 2017 balance sheet were trade and unbilled payables and advance payment received from construction contracts. The graphic illustrates more information.

4.2.1. PREB quantitative scenario projections

4.2.2. Assumption of projection in three different case scenarios

• Conservative projection case: The -10% growth in the construction business and achieve 70% of company’s projection for property business with 12% net profit during 2019-2021. Even in the conservative case (worst case), there are still visible growth in EPS, 5.73%, 25.7%, 22.1% in 2019, 2020, 2021 appropriately.

• Base projection case: The 0% growth in the construction business and achieve 85% of company’s projection for property business with 15% net profit during 2019-2021. Base case has EPS growth of 23.88%, 33.30% and 44.46% in 2019-2021 according[19], and there is a high chance of this happening due to the past performance of PREB being able to complete every project in time.

• Best projection case: The 10% growth in the construction business and achieve 100% of company’s projection for property business with 15% net profit during 2019-2021. And for this case the growth would be 38.10%, 43.11%, 32.67%, this is the best-case scenario, however it still is very likely for PREB to complete 100% of its project and make this happen.[20]

With these three different cases projected, EPS increases in every case. Also, a decrease of PE (Price-Earnings Ratio) in every case meaning the stock is getting cheaper. PE is incredibly low since PREB is a new company starting from zero, so it is possible for them to grow hundreds and hundreds of percent unlike large stable companies, it is harder for them to grow 100% etc.

4.3. Qualitative

4.3.1. SWOT (Construction side of PREB)

•     Strengths → quality contractor with experience in construction of high-rise buildings of more than 50 floors, half of the backlog on hand is from old customers, which believe in the quality and timeliness of its work, VERY LOW DEBT (near zero IBDE),PREB is able to maintain a high gross margin (also comes from having good relationships with recent customers meaning they receive the next project without having to bid against other contractors (lowest bidder gets the project)

•     Weaknesses → There absolutely no weakness from the statements analysed.

•     Opportunities → massive expansion in mass transit meaning new expensive lands which is PREP’s aim, increasing in projects.

•     Threats → The fixed interest rate will stimulate increase in the construction companies in the near future.

4.3.2. SWOT (Property side of PREB)

• Strengths → JV with experienced developers. This includes Thailand and Foreign partners (Japanese) – choosing the right location and marketing technique, PREB delivers a gross margin of around 30% in the real estate business[21], which is in line the market due to synergy with the construction business

•     Weaknesses → PREB is still an inexperienced/newcomer in the property sector.

•     Opportunities → massive expansion in mass transit leading to increase in demand.

•     Threats → rising NPL (non-performing loan) percentage in mortgage loan due to too much borrowing from public, from 1st of April 2019 Bank of Thailand instructed commercial banks to increase down payment of mortgage loan (1st house 10% 2nd 20% 3rd 30%) used to be 10% for every house to decrease speculation in property.

5.0. CONCLUSION

PREB has three businesses in its portfolio. They are

1. construction contractor business (PREB Co.,Ltd itself),

2. property development business (Pre-Built Holding "PBH") and

3. construction material supply business (PCM). 

1) PREB's construction business is the most promising cash cow of PREB group.  It is a cash rich business with zero IBDE.  Being one of the few high-quality construction contractors, PREB consistently get the excess advance payment from its listed property developer customer and high-rise office customers due to the excess demand in the industry.  upward trend in revenue, gross profit margin, net profit margin, revenue and high sustainable dividend yield payment of 8%.  During the current construction boom in Thailand both in the infrastructure segment and property development segment, the foreseeable future is very promising for this construction contractor business with moderate growth in revenue, gross profit margin and net profit margin.

2) Pre-Built Holding (PBH), PREB's property development business,

2.1) Is Am Are (IAA), PBH's 100%-owned subsidiary, has a portfolio of three projects.  Revenue is expected to be recognised from 2019 onward,

2.2) PBH invests in four JV projects.  PREB will realize its share of profit and loss from each JV project in that year in accordance to the standard accounting practices for JV from quarter 4 2019 onward,

 Property business's revenue will be realized only after the properties are finished and transferred to customer.  According to PBH business projection, PBH will have a revenue of 745 million baht in 2019 and a growth of 173% in 2020 and 68% in 2021.  While PREB's construction business is a cash cow, PBH, its property business arm will be a growth engine because it starts from zero.

Having shown 2 successive high revenue and net profit growth in 2020 and 2021, PREB plan to file PBH for a listing in the Security Exchange of Thailand.  PBH has a plan to further acquire more land plots and launch more new projects for a further growth of 30% during 2022 and 2023 in order to qualify for a high P/E IPO stock price for growth stock.  This high growth level is possible for small size company that starts from zero operation and PREB has all the required experience in both the construction business and property business with healthy financial fundamental to make to plan successful.

90% of the projects in the 2019-2021 have already been started.  One of the JV, worth 1429 million baht, is 100% sold out and wait for the finish of the construction and transfer.

This PBH IPO could potentially be a future hidden value of PREB and its shareholders. 

3) PCM's income and net profit show higher than 2017 with growth in high margin products.  However, it is the smallest part of PREB and contributes the least.

Though all these three businesses are performing well in the past few years and seems to be promising for the next few years, it is essential that we have to keep in mind that these three businesses have a cyclical nature according to macro-economic cycle and therefore we need to harvest this investment well before the starting of the next economic downturn.

The paper based its conclusion on the analyses obtained from PREB financial statement to support the call for investing in stocks. The investments by PREB in stocks as prove that the public should take after this initiative to invest in stocks. Going by the assumption of the construction financial data, the 12% growth in net profit in the near future makes its valuable business worth investing. The paper concludes that the Thailand property business will experienced further boom. Therefore, the public are invited to invest in this stock .This leads to the conclusion:

Bibliography

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[1]. Jacob A. Bikker, Pension Fund Economics and Finance: Efficiency, Investments and Risk-Taking (New York: Routledge, 2018), 21.

[2]. SET, PREB (2018), accessed 11 December, 2018, https://www.set.or.th/set/factsheet.do?symbol=PREB

[3]. Stephen Eckett, Harriman’s Stock Market Almanac 2018: [A Handbook of Seasonality Analysis and Studies of Market Anomalies to Give Investors an Edge throughout the Year] (Petersfield: Harriman House Ltd, 2017), 30.

[4]. SET, PREB (2018), accessed 11 December, 2018, https://www.set.or.th/set/factsheet.do?symbol=PREB

[5]. Ibid.

[6]. Bank of Thailand, Monetary Policy (2015), accessed 24 November, 2018, https://www.bot.or.th:443/English/BOTStoryTelling/Pages/MonetaryPolicy_StoryTelling_Press.aspx

[7]. Ibid.

[8]. Niratsai Toomwongsa, Construction Contractor (2018), accessed 3 December, 2018, https://www.krungsri.com/bank/getmedia/bb684bcf-6d7a-46ad-9bc6-040b23875b0c/IO_Construction_Contractor_2018_EN.aspx

[9]. Ibid.

[10]. Jeffrey A. Hirsch and Yale Hirsch, Stock Trader’s Almanac 2018 (Hoboken: John Wiley & Sons, 2018), 42.

[11]. Arthur H. Kohn and Howard Pianko, Pension Plan Investments, 2018: Current Perspectives (New York: Practising Law Institute, 2018), 47.

[12]. Niratsai Toomwongsa, Construction Contractor (2018), accessed 3 December, 2018, https://www.krungsri.com/bank/getmedia/bb684bcf-6d7a-46ad-9bc6-040b23875b0c/IO_Construction_Contractor_2018_EN.aspx

[13] Ibid.

[14]. CBRE, Q3

(2017), accessed 3 December, 2018, https://www.cbre.com/research-and-reports

[15]. Ibid.

[16]. Martin Roth, Top Stocks 2018: A Sharebuyer’s Guide to Leading Australian Companies (Milton: Wrightbooks, 2018), 76.

[17]. Ali Saeedi and Meysam Hamedi, Financial Literacy: Empowerment in the Stock Market (Cham: Palgrave Macmillan, 2018), 22.

[18]. Greg Schnell and Lita Epstein, Stock Charts (Hoboken: John Wiley & Sons, 2018), 90.

[19]. William T. Ziemba, Mikhail Zhitlukhin, and Sébastien Lleo, Stock Market Crashes: Predictable and Unpredictable and What to Do About Them (New Jersey: World Scientific, 2018), 101.

[20]. SET, PREB (2018), accessed 11 December, 2018, https://www.set.or.th/set/factsheet.do?symbol=PREB

[21]. Wikipedia, Mass Rapid Transit Master Plan in Bangkok Metropolitan Region (N.d.), accessed 11 December, 2018, https://en.wikipedia.org/wiki/Mass_Rapid_Transit_Master_Plan_in_Bangkok_Metropolitan_Region