Initiating Coverage 17 February 2015 KSL Holdings Bhd OUTPERFORM Price: RM 2. 15 Deep Hidden Value Target Price: RM 2.76 By Adrian Ng l [email protected]; Sarah Lim l [email protected] Initiating coverage with OUTPERFORM recommendation and TP of RM2.76. Share Price Performance Despite its large Johor exposure which has been perceived to be overplayed due to rising incoming house supplies (especially high-rises), we like KSL given its exposure in the locally driven mass market segment coupled with its ability to price its product competitively due to their low land costs. That aside, one third of their income stream is derived from investment properties which offer earnings resiliency should property sales performed worse than expected; notably, KSL City Mall and Hotel is one of the larger malls and better managed hotel in Johor Bahru town centre. Hence, we are conservatively estimating FY15-16E earnings of RM310m (+6%, YoY) and RM348m (+12%, YoY), based on FY15-16E sales assumptions of RM988m- RM993m, respectively. Our TP of RM2.76 is based on 61% discount applied to its FD RNAV of RM7.07 which is within the discount range (60%-65%) pegged to Johor-based developers under our coverage i.e. CRESNDO and UEMS. At KLCI 1,808.89 our TP, the implied FY14-15E PER of 7.4x-7.0x is still cheaper compared to its YTD KLCI chg 2.7% mid-cap peers which are trading at 8.2x-7.5x, respectively. We admit that the YTD stock price chg 15.0% Malaysian property landscape will be challenging this year, particularly 6-9 months after GST implementation, so share price could be volatile. However, Stock Information we reckon that the deep values of KSL should offer some valuation downside risks to current levels while we believe this year’s volatility in property share Bloomberg Ticker KSL MK Equity prices should offer good entry points for long-term positioning of the stock. Market Cap (RM m) 1,962.3 Low land cost = better margins and pricing flexibility . The group’s land cost is Issued shares 912.7 relatively low considering that the majority of its Johor landbanks were acquired 52-week range (H) 2.49 back in 2002-07. This allows KSL better pricing flexibility which enables them to 52-week range (L) 1.03 continue catering for the affordable market segment with different products while 3-mth avg daily vol: 1,545,252 maintaining its decent margins. KSL’s 3-year operating income margins averaged at Free Float 50% 42.2% which is far superior to the overall developers’ 3-year average operating margins of 25.2%. Beta 1.1 Earnings diversification through strong recurring income stream . Its investment properties in Johor has done relatively well, reporting segmental Major Shareholders operating profits of RM107m in FY13 or a 2-year CAGR of 85%. It makes up a third PREMIERE SECTOR SDN 32.8% of their income and helps provide some earnings safety, cushioning the impact from CHENG HAI KHOO 8.9% slower sales, should the property market remains soft. Notably, their investment HWA SENG KU 8.2% property assets are severely undervalued by RM1.55b considering FY15E operating income of RM144m and conservative 7% cap rate and FY15E operating Summary Earnings Table income of RM144m yields a valuation of RM2.05b! If they do revalue their assets, it FY Dec (RM m) 2014E 2015E 2016E could raise their BV/sh by 104% to RM3.90, while further strengthening their balance sheet. Turnover 938 983 1,090 EBIT 399 420 467 Deep pockets with more gearing headroom. As at 9M14, the company’s net gearing remains fairly low at 0.01x, providing ample flexibility to gear up by another PBT 391 413 464 RM750.0m for either further land banking activities in Klang Valley/Johor or to fund Net Profit (NP) 293 310 348 its CAPEX for property investment in Klang which is slated to be developed over 10 Cor e Net Profit (NP) 293 310 348 to 15 years. Going forward, we are estimating its net gearing to inch up to 0.03x Consensus (NP) n.a. 273 n.a. levels post its recent acquisition of its Batu Pahat agriculture land for RM90.6m. Earnings Revision n.a. n.a. n.a. Potential dividend policy? Over FY11-13, the company held back dividend EPS (sen) 37.3 39.5 44.3 payment. Prior to this ‘quiet’ period, KSL’s dividend yield ranged between 4%-6%. In Core EPS (sen) 37.3 39.5 44.3 the recently concluded 9M14 results, the board has proposed an interim single-tier FD Core EPS (sen) 30.4 32.1 36.0 DPS of 5.0 sen post the 1-for-1 bonus entitlement. Dividend Reinvestment Plan (DRP) will apply to this interim dividend where shareholders will be given an option EPS growth (%) 57% 42% 62% to elect to reinvest in whole or part of the electable portion. Following its maiden Core EPS growth (%) 57% 35% 66% dividend payment and DRP, we believe that there is a high likelihood of a formalised NDPS (sen) 11.2 11.8 13.3 dividend policy. For the full FY14, we are anticipating single-tier DPS of 11.2 sen BV/Share (RM) 1.89 2.17 2.48 (5.2%) based on a payout ratio of 30%. PER (x) 5.8 5.4 4.9 Estimating FY14-15-16E core earnings growth of +66%, +6% and +12% YoY, Core PER (x) 5.8 5.4 4.9 respectively. Current record high property unbilled sales of RM1b provides up to 1 FD Core PER (x) 7.1 6.7 6.0 year visibility. PBV (x) 1.1 1.0 0.9 Attractive valuations vis-à-vis peers. KSL is currently trading at FY14-15E core Net Gearing (x) 0.1 0.0 -0.1 PERs of 5.8x-5.4x which is attractive against its mid-cap peer average of 8.2x-7.5x, and not to mention that it is also the most undervalued developer amongst our list of Dividend Yield (%) 5.2% 5.5% 6.2% mid-cap peers. We would also like to point out that: (i) KSL’s earnings growth is also stronger than its peers, (ii) developers that deliver close to RM300m core earnings annually are typically large cap developers with a minimum market cap of RM3.0b. PP7004/02/2013(031762) Page 1 of 24 KSL Holdings Bhd Initiating Coverage 17 February 2015 EXECUTIVE SUMMARY Initiating coverage with OUTPERFORM and TP of RM2.76 . Despite its large Johor exposure which has been perceived to be overplayed due to rising incoming house supplies (especially high-rises), we like KSL given its exposure in the locally driven mass market segment coupled with its ability to price its product competitively due to their low land costs. That aside, one third of their income stream is driven by investment properties that offer earnings resiliency should property contributions weaken; notably, KSL City Mall and Hotel is one of the larger malls and better managed hotel in Johor Bahru town centre. Our TP of RM2.76 is based on 61% discount applied to its FD RNAV of RM7.07 that is in-line with the discount rate (60%-65%) pegged to Johor-based developers under our coverage i.e. CRESNDO and UEMS. At our TP, the implied FY14-15E PER of 7.4x-7.0x is still cheaper as compared to its mid-cap peers that are trading at 8.2x-7.5x. On a fully diluted basis, assuming all warrants are converted, KSL’s valuations remains decent as our TP of RM2.76 still implies FY14-15E core PER of 9.1x-8.6x only which is in- line with peers. We admit that the Malaysian property landscape will be challenging this year, particularly 6-9 months after GST implementation, so share price could be volatile. However, we reckon that the deep values of KSL should offer some valuation downside risks to current levels while we believe this year’s volatility in property share prices should offer good entry points for long-term positioning of the stock. 1. Investment Merit A township player with c.2,422 acres landbank in prime and upcoming locations, of which 78% is located in Johor while the balance is mostly in Klang. KSL’s landbanks are mainly township development in nature and are situated in more locally- populated areas of Johor. They have four on-going townships in Johor (Nusa Bestari, Kempas Indah, Bestari Indah, Mengkibol) and one in Klang (Bandar Bestari). The 2,422 acres of landbank are inclusive of the 42 acres of land acquired back in 2014 and also the recent proposed acquisition of 297 acres of land in Batu Pahat. Location of Properties in Johor Source: Company, Kenanga Research High-density and well-connected Johor projects. Most of its Johor township like Nusa Bestari, Kempas Indah, and Bestari Indah are well located being just 5–10 minutes away from the North-South Highway and only 15–20 minutes away from Johor Bahru City Centre and the new CIQ. In the past, their products in these townships were mainly landed residentials although the company is moving towards high-rise residential developments which would yield a higher value extraction per acre.. Positively, they have secured quite a number of approvals for high-rise developments (min. of 4x plot ratio), which is handy considering that landbanks in good locations are tougher to come by or are exorbitantly priced. High density ratios also enable them to continue operating in the resilient local buyers’ market.