KSL Holdings Bhd’s announcement last Monday of a dividend policy under which it will pay out at least 40% of its net profit (excluding fair value gains) shows how serious developers are in trying to sustain consistent investor interest in the cyclical property industry.

With its latest move, KSL (fundamental: 2.6; valuation: 1.8) is joining a handful of mid-tier property players that have committed themselves to a somewhat generous dividend policy.

For example, Penang-based Tambun Indah Land Bhd (fundamental: 2.7; valuation: 2.4) and Negeri Sembilan-based Matrix Concepts Holdings Bhd (fundamental: 2.6; valuation: 2.4) pay out a minimum 40%.

Other examples are Johor-based plastics manufacturer-cum-developer Scientex Bhd (fundamental: 1.7; valuation: 2.4) and I-Bhd (fundamental: 3; valuation: 3) — the master developer of i-City in Shah Alam — which pay out 40% and 30% respectively.

“Not many small and medium property players have a dividend policy because property-related earnings tend to be cyclical and can be unpredictable. Perhaps, KSL can commit to this because it is strengthening its recurring income base,” says an analyst.

Interestingly, KSL only resumed paying dividends in the financial year ended Dec 31, 2014 (FY2014), after not declaring any from FY2011 to FY2013. According to the group’s presentation to investors, the FY2014 dividend amounted to RM93.1 million or 10 sen per share, representing a payout of close to 36.3% of net operating profit.

Based on KSL’s share price of RM2.11 last Friday, the 10 sen dividend translates into a yield of 4.7%. With the latest dividend policy of at least a 40% payout, analysts estimate KSL’s dividend yield to increase to 6.4%.

In a recent report, Kenanga Research notes that its projected yield for KSL of 6.4% is attractive compared with its peers’ average of 5.1%. It also notes that KSL is trading at only 6.2 times FY2015E price-earnings ratio vis-à-vis its peers’ average of eight times.

Nevertheless, KSL’s latest dividend policy will still be subject to factors that include financial performance, cash flow requirements, availability of distributable reserves and tax credits, future operating conditions, future expansion, capital expenditure and investment plans.

Last year, KSL introduced a dividend reinvestment plan (DRIP) under which shareholders were given the option to either reinvest part of the dividend paid or all of it. They could opt to reinvest the cash dividend in buying KSL shares at a discounted price, thus enabling the company to retain more cash.

KSL is in the midst of growing its recurring income base, which has accounted for about 20% of its earnings historically, by deriving more revenue from its property investment segment.

Its FY2014 results indicate that property investment contributed a segmental profit of RM181 million — up 69% from RM107.1 million in FY2013 — or 42% of the group’s pre-tax profit of RM429.6 million.

KSL owns KSL City, an integrated development comprising KSL Shopping Mall and KSL Hotel & Resort, in the heart of Johor Baru, and other investment properties such as Giant@Nusa Bestari, Giant@Muar and KSL Resort. KSL City Mall, the group’s flagship, has a gross floor area (GFA) of one million square feet and total lettable mall space of 775,000 sq ft. Its occupancy rate is 95%.

To grow its recurring income base, KSL also has big plans for a commercial development in Bandar Bestari, Klang, where it has 100 acres, about half of which has been earmarked for a retail mall. With a GFA of about 1.8 million sq ft, the mall will be developed over 10 years, notes Kenanga Research.

According to KSL, the group has another 10 acres in Johor for development where it will retain properties for investment purposes.

It has about 2,448 acres in total for current and future development in Johor Baru, Batu Pahat, Kluang, Segamat, Muar, Mersing, Klang and Kuala Lumpur. In a recent presentation, the group said it was targeting to launch projects with a combined gross development value of RM6 billion over five years.

In FY2014, KSL’s net profit grew 87.4% to RM340.2 million from RM181.5 million the year before while revenue rose 17.8% to

RM801 million. The earnings included a revaluation of investment properties amounting to RM88.2 million.

In tandem with its strong financial performance, KSL’s shares rose from RM1.66 on Jan 6 to close at RM2.11 last Friday, giving the company a market capitalisation of RM1.97 billion. The stock hit a high of RM2.38 last September before surrendering the gains in a general market selldown triggered by a sharp fall in crude oil prices and the ringgit.

However, while things look positive for KSL, a number of analysts feel the overall outlook for the property sector is negative right now.

“The operating environment is currently tough for property developers. We expect top-line demand to weaken in certain segments, such as high-rises in the Klang Valley and properties in Iskandar Malaysia, due to oversupply. That, coupled with escalating costs, could put some developers at risk. So, it all boils down to the individual developer — how strong its balance sheet, margins and product mix are,” says an analyst.

Maybank Investment Bank Research notes in a Feb 8 report that there will likely be a lull in demand post-implementation of the Goods and Services Tax that could last 9 to 12 months due to affordability issues, subdued buyer sentiment and lack of interest in big-ticket items.

“Weak buying sentiment and higher operating costs post-GST are the key issues for developers,” it says, adding that the property sector lacks re-rating catalysts at the moment.

Nevertheless, with a low land holding cost and its own construction arm, KSL has been able to attain better margins than its peers. Between FY2010 and FY2014, its gross margin was between 54% and 60%, making it the most likely to weather the current tough times. Besides, management has shared that it still had unbilled sales of RM1.02 billion as at end-2014, equivalent to more than a year’s revenue.

Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 23 - 29, 2015.

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