KSL Holdings Bhd
(June 8, RM1.81)
Maintain outperform with a target price of RM2.48: For the first quarter ended March of financial year 2015 (1QFY15), KSL managed to register only RM149.9 million worth of sales, making up only 18% of our full-year estimate of RM832.1 million. This industry-wide trend is not surprising, however, with 54% of developers under our coverage also missing targets or behind in sales. 

The weaker-than-expected sales were due mainly to the tight lending environment and fewer new launches  as management takes a more conservative view of the market.  Just like its competitors, most of its planned launches, totalling RM700 million, are skewed towards the second half of FY15, and are mainly in the affordable segment. Positively, its investment properties have seen further margin expansion by five percentage points to 63%, year-on-year (y-o-y) and we believe that it will continue to provide earnings resiliency to the group should its developments slow down.

In a recent briefing, management highlighted that it intends to grow the company’s recurring income base to further diversify away from overdependence on property development earnings.  Hence, management is targeting to launch/commence works on its second property investment asset — KSL City Mall 2 — by end-2015 or early 2016.  However, we believe work on KSL City Mall 2 will commence in late 2016 as management has yet to finalise its building plans for the mall.

KSL’s balance sheet is strong as its net gearing remains relatively low at only 0.03 times as at 1QFY15. Should the need arise for massive land banking or to finance the construction of its second investment property, we believe KSL can easily raise up to RM900 million with its net gearing climbing up to 0.52 times, which is still within our comfortable range of 0.5 times to 0.6 times.

Post briefing, we lower FY15 and FY16 sales by 8.5% and 7% to RM761 million (down 8.3% y-o-y) and RM773 million (up 1.6% y-o-y), respectively, given the challenges highlighted above. However, the group expects net margin to remain stable at 32% as it is well supported by its low land cost and property investment division. — Kenanga Investment Bank Research, June 8

This article first appeared in The Edge Financial Daily, on June 9, 2015.