Edge Weekly: KSL: Hidden gem with steady recurring income

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JOHOR-based KSL Holdings Bhd is thought to be one of the more innovative developers in the state whose properties are much sought after.

Its property sales have been brisk, as evidenced by its staggering revenue growth from RM186.2 million in FY2009 to RM688.16 million in FY2013.

With the company’s assets boasting a book value of RM3.86 per share — nearly double its closing price last week of RM2.16 — investors see the stock as a highly attractive long-term proxy for the property market in Johor, particularly Iskandar Malaysia, and the Klang Valley.

In fact, KSL’s assets could be worth a lot more than their book value. Besides, the low-profile property developer has growing recurring income that will improve its earnings profile. 

KSL’s 2,100 acres are likely to be worth substantially more than their book value, thanks to escalating land prices in both Johor and the Klang Valley. Many of the company’s parcels have not been revalued to reflect current market prices. For example, its 148.66ha in Klang are carried at RM177.9 million or RM11 psf in its books. According to its latest annual report, the land was valued in 2007. In the meantime, nearby tracts are fetching at least RM20 psf more than current prices, which means that a revaluation of the Klang land would add hundreds of millions to KSL’s asset value.

“KSL’s advantage lies in the quality of its projects and a highly competitive pricing strategy. Its shopping mall in Johor Baru has been quite successful in attracting tenants,” says Lim Boon Ping, general manager of Johor-based Tiram Realty Sdn Bhd.

KSL City, an integrated development that comprises a commercial podium of retail shops, hypermarkets, hotels and condominiums, is the company’s jewel in the crown, earning steady recurring income of at least RM100 million a year.

But when it comes to its shares, KSL seems to be a laggard in the sector. Over the past year, the stock has stayed flattish, which means poor performance, although its peers have seen a significant appreciation.

In its financial year 2013 ended Dec 31, KSL’s property investment division generated a profit before tax of RM107.12 million or 42% of the company’s total PBT of RM256.48 million.

Out of the division’s revenue contribution of RM134.73 million, some RM71.81 million came from rental income while RM62.80 million was generated by its hotel and food and beverage operations.

With more than a third of its pre-tax profit coming from a recurring income source, fund managers believe the company will be cushioned from the adverse effects of a property down cycle to a large extent.

Nonetheless, property development remains KSL’s major contributor with property sales of RM550.98 million in FY2013 — the bulk of total group revenue of RM668.16 million.

“The company is better known for its new housing estates in Johor, namely Bestari Indah and Taman Nusa Bestari, which were both well received,” says Tiram Realty’s Lim.

KSL is undertaking at least seven major property projects in Johor and the Klang Valley as stated in its annual report.

A major development is a 448-acre township in Klang called Bandar Bestari. Another is a high-end condominium called 18 Madge in the highly sought-after address of Jalan U-Thant in Ampang Hilir.

Based on its closing of RM2.16 last Friday, the stock has a historical price-earnings ratio of a mere 4.5 times, according to Bloomberg data.

According to Hong Leong Investment Bank Research’s figures, KSL has a realised net asset value of RM3.86 per share, which translates into a price-to-book value of 0.55 times.

If we used the benchmark earnings multiple for the property sector of 7.92 times via the Kuala Lumpur Property Index, KSL’s shares should theoretically be worth RM3.53 based on its earnings per share of 44.6 sen in FY2013. This implies a 63% premium to last Friday’s closing price.

KSL is controlled by the Ku family, which holds a 37.47% stake through Premiere Sector Sdn Bhd. Its executive chairman is Ku Hwa Seng, whose older brother Khoo Cheng Hai @ Ku Cheng Hai holds the post of group managing director. Younger brother Ku Tien Sek is the executive director. 

KSL’s annual report shows that four executive directors were paid a combined RM24.37 million in FY2013, nearly double the RM12.6 million paid in FY2012. The remuneration is 14% of net profit in FY2013 and 9.5% in FY2012. Some investors consider this excessive.

KSL is off the radar screen of property analysts because of the lack of information disseminated to the investing public.

There are scant details of the gross development value of its projects and landbank. The company also does not disclose its unbilled sales figure, which is an essential metric for evaluating its revenue growth trajectory in the immediate future.

“Access to management has been particularly difficult over the past couple of years, making it difficult for us to make meaningful earnings forecasts for KSL,” says HLIB Research’s analyst Sean Lim in a February note. The research house has since ceased coverage of the stock.

All this is probably why KSL has not outshone its peers despite churning impressive earnings growth.

This article first appeared in The Edge Malaysia Weekly, on June 23 - June 29, 2014.