KUALA LUMPUR (Feb 17): Shares of KSL Holdings Bhd rose as much as 4.19% to RM2.24 in morning trades after Kenanga IB Research initiated coverage on the stock with an "Outperform" rating and a target price of RM2.76.

As at 10.33am, KSL (fundamental: 2.6; valuation: 0.6) had eased to RM2.23, still up 8 sen or 3.72%. At the current price, it has a market capitalisation of RM1.968 billion.

KSL was the ninth largest gainer across the local exchange.

Some 2.028 million shares changed hands between RM2.16 and RM2.24 today.

The stock was traded at a low of RM1.025 on March 25, 2014 before climbing to its current level.

Kenanga's analyst Adrian Ng said he continued to like KSL due to its ability to price products competitively because of its low land costs.

This despite noting the perception that KSL's exposure had been been overplayed, given rising incoming house supply in the southern state.

According to Ng, KSL’s three-year operating income margin averaged at 42.2%, far superior to the overall developers’ three-year average operating margin of 25.2%.

"That aside, one third of their income stream is derived from investment properties which offer earnings resiliency should property sales performed worse than expected," he added.

KSL is a property developer and is currently the manager of KSL City Mall and Hotel in Johor Bahru town centre.

Ng notes that KSL's investment property assets are severely undervalued by RM1.55 billion, considering FY15 operating income of RM144 million and a conservative 7% cap rate.

"FY15 operating income of RM144 million yields a valuation of RM2.05 billion. If they do revalue their assets, it could raise their book value per share (BV/sh) by 104% to RM3.90, while further strengthening their balance sheet," Ng said.

Ng expects KSL to register RM310 million in earnings in its financial year 2015 (FY15), up 6% year-on-year, and rising 12% on-year to RM348 million in FY16, based on FY15 and FY16 sales assumptions of RM988 million and RM993 million respectively.

"Our TP of RM2.76 is based on a 61% discount applied to its fully diluted realisable net asset value (FD RNAV) of RM7.07 which is within the discount range of 60% to 65%, pegged to Johor-based developers under our coverage," he said.

"At our TP, the implied FY14 and FY15 price to earnings ratio (PER) of 7.4 times and 7 times is still cheaper compared to its mid-cap peers which are trading at 8.2 times and 7.5 times, respectively," Ng added.

Ng sees the Malaysian property landscape remaining challenging this year, particularly in the six to nine months after the goods and services tax (GST) implementation, so share price can 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," he said.

Ng estimates KSL's net gearing to inch up to 0.03 times from 0.01 times as at 9MFY14, post its recent acquisition of agricultural land in Batu Pahat for RM90.6 million.