Friday 29 Mar 2024
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KSL Holdings Bhd’s shares and warrants have succumbed to selling pressure despite the Johor-based property developer having achieved a record high profit for the financial year ended Dec 31, 2014.

It posted a net profit of RM340.17 million, or 80.65 sen per share, in FY2014, an 87% increase compared with FY2013.

The selling was partly because the group’s earnings have come in below expectation due to slower billing recognition from property sales. According to Kenanga Research, excluding a property revaluation gain of RM88.2 million, the group’s core profit would be RM252 million, versus expectation of about RM300 million.

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However, the current share price weakness could offer an entry point to the group, which has a massive landbank in Iskandar Malaysia that it acquired long before the boom. The group also enjoys stable recurring rental income from its shopping mall and hotel in Johor Baru.

Rental income grew to RM72.08 million in FY2014, from RM64.28 million a year ago. Its rental earnings are indeed higher than that of some of the listed real estate investment trusts.

In addition, KSL has achieved an average profit margin of 34%, thanks to low land costs.

Last month, Kenanga Research initiated coverage on KSL with a target price of RM2.76, implying a 34% upside from last Wednesday’s closing price. Assuming zero premium, the company’s warrants (KSL-WA) would theoretically be worth RM1.96 (RM2.76-RM0.80), or a 62% upside.

“Its low land costs provide greater flexibility in pricing, which helps KSL cater for the affordable market segment, while maintaining decent margins. Furthermore, its growing property investment income helps provide earnings security should the broader property market remain soft,” says Kenanga Research analyst Adrian Ng.

He adds that KSL’s property assets are severely undervalued by RM1.55 billion. A revaluation of the group’s assets could yield an additional valuation of RM2.05 billion, which would translate into a book value of RM3.90 per share.

KSL-WA carries an exercise price of 80 sen and a one-to-one conversion ratio. The derivative expires on Aug 8 next year.

As at last Wednesday’s closing price of RM1.23, the warrant has gained 22% this year. Its premium has been near zero in the past six months.

Nonetheless, KSL has started rewarding its shareholders with dividends. It has declared a post-adjusted dividend of five sen per share for FY2014. Should the group decide to start paying dividends regularly, investing in KSL-WA may not be as attractive as holding the mother share.
 

This article first appeared in The Edge Malaysia Weekly, on March 9-15, 2015.

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