Morningstar | Strong 1Q Results for SRD Driven by Residential Sales, but Momentum to Slow Ahead
For the three months ended June 2018, Sumitomo Realty & Development, or SRD, reported both revenue and net profit up 14% to JPY 308 billion and JPY 49 billion, respectively. The growth was attributed to strong residential sales during the quarter, achieving revenue and operating income up 26% and 34% year on year, respectively. The first-quarter operating income accounted for 72% of the company's full-year target for the segment. The leasing business perform as expected, recording small top line growth and flat operating income. Despite a strong first quarter, the company kept its conservative guidance for fiscal year 2018 intact. We maintain our fair value estimate at JPY 3,800 per share and reaffirm our no-moat rating with stable moat trend.For the residential sales business, total units sold declined by 25%, yet revenue was 26% higher due to higher selling prices and larger units being offered in the premium condominium market. Margin also expanded as costs remained constant, resulting in operating profit being up 34% year on year. Based on the company's full-year guidance, the residential sales business has achieved 54% and 72% of the full-year guidance in revenue and operating incomes. However, the volume decline was large, with units sold reaching the lowest level in two and half years. Given the company guidance for the segment is very conservative with flat revenue and earnings, we expect sales pace to slow considerably after this quarter.
The leasing business' performance was muted with operating income flat while top line grew 3%. The office vacancy rate seemed to climb higher since the beginning of 2018, reaching 4.9% at end of March, the highest level seen in the three years. The flat earnings were not surprising. The company guided a top line growth of 3% and operating income growth of 4% for the year. With a revenue and operating income run rate of 25%, the leasing business is performing in line with expectation.
Net gearing dropped marginally lower during the quarter, now at 274% from the peak of 440% five years earlier. Despite its still highly leveraged balance sheet, the company has continued to benefit from the low interest rate environment.
Sumitomo Realty & Development is mainly engaged in the real estate business. Co.'s principal business segments are real estate leasing, real estate sale, construction, brokerage, and others. It is engaged in the development, direct leasing and management of office buildings and condominiums, the sublease of properties leased from special purpose companies, the provision of hotel business and the operation of event halls and conference rooms; the development and sale of condominiums, buildings, detached houses, housing land and other properties; the construction and remodeling of houses; the brokerage and sale of real estate; and the operation of fitness clubs and restaurants.
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