KSL (5038) : KSL - A rising tide in the property game

KSL (5038) : KSL - A rising tide in the property game

I am glad that NONE of my stocks recommended to you guys are from the O&G sector. But the sell down has actually created opportunities to buy other stocks that should not be affected by this O&G tragedy. IFCA now offers 50% upside from my target price and any weakness next week will be a great chance to accumulate. My top pick remains - IFCA/SMRT/MEGB and Taliworks.

Taliworks - Q3 2014 came unexpected huge gains after their restructuring exercises, which saw a hefty gains of RM280m or 64cents on that quarter itself! This stock has tremendous potential, with disposals in its China operation and potential bonus issue coming up to boost its liquidity. CIMB has a target price of RM2.96 and according to sources, there will be more value accretive acquisitions coming up, and this stock might be one of the defensive utility stock you should look out for. Below RM2.20 is a no brainer.

SMRT - Q3 2014 higher than Q2 2014, a more detail analysis, you could find that its revenue has been increasing tremendously for the quarter, and I expect better margins going forward. Q4 2014 will be much much stronger.

MEGB - I have highlighted that Q3 2014 results will be a profit, and it only moves after a week I have blogged it. More to come.

EPMB - Expected profit.  Dividends as usual.

Seacera - Expected weak profit. Catalyst remains on Kajang Land development and Warisan Merdeka job. Watch this stock on Jan 2015.

Careplus - Due to fast expansion, the growth numbers will only come in on 2015.

Guocoland - Profit came below expectation. Only for trading.

Sentoria - Profit came below expectation. Only for trading.

Samudra - Cash rich entity and started to make profits now. Watchout this one if there are potential RTOs announced.

Goodway - I have switched all Goodway position to IFCA for exposure in GST due to better profits and story ahead.

Ok! back to main topic. With the recent property slowdown in the Malaysian property market, investors are becoming more and more cautious before they even decide to add any property stocks into their portfolios. It is difficult to find an undervalued property counter and yet has a good story flow that could attract a lot of attention to it in the current market condition, especially the attention from fund managers. After some research and site visits, KSL Holdings stood out immediately as a property company I think which would see a lot of interests in it in the coming months and even years as it slowly opens up to the general public.

TP: RM6.43

Current price: RM4.54

Market cap: RM1,767m

Upside: 42%

(A) Company Background

KSL was founded 30 years ago from 3 brothers in their hometown, Segamat. Over time, they have eventually expanded into Johor Bahru and Klang and it was a very much low-profile company until Templeton fund managed by Mark Mobius purchased 5% in KSL. Mark Mobius had stated in the press releases back in 2010 that he had seen a huge potential in KSL Holdings in the next decade, given that it had ambitious plans at that time to build the KSL City – an integrated project consisting of a shopping mall, hotel and residential area which could change the landscape of Johor Bahru by providing a new residential area for local and Singaporean residents who could enjoy the comfort of having a mall next to them.

Bandar Bestari, Klang

Bandar Bestari is the latest icon project by KSL, a mixed development project located at thew new growth corridor of Klang, at 465 acres. Bestari Business Park will be a mixed development consisting of shops and light industry factory. Both sites are near to NKVE, Kesas, Federal Highway. According to Kenanga, these 2 pieces of land is worth more than RM14b gross development value (GDV) which works out to be RM30m GDV per acre which I think is fairly valued.

KSL City

KSL City has transformed KSL Holdings into a property investment and property development company as it no longer just develops new projects and townships. It started having recurring income from its investment arm which could contribute a lot to its current earnings. It is a total game changer as its operational costs are not that high given that its rent could only increase in time, and I actually found this out while making a trip to KSL City mall just recently. I found out that tenants there were only paying about RM12/sq ft on average and this is way lower than KSL mall’s closest competitor, City Square which charges tenants for RM18-20/sq ft. This means that KSL is still giving a huge discount in its rental rate to its customers, probably because they are still new but I would assume that this would increase more over time as its name gets more established and whatever increase in its rental rate would be extremely positive to KSL, given that this does not affect much of its operational costs-that would only continue to improve its bottom-line. 

Other land

In this case, Kenanga has helped us to actually analyse the figures for KSL and this has saved me a lot of time too. I have checked out the GDV tables provided by them and the numbers look sensible to me, at a total GDV of RM40b! That is very impressive, much more potential than Mahsing and UOA!

http://www.bursamarketplace.com/index.php?ch=44&pg=158&ac=5188&bb=research_article_pdf

(B) Shareholders
Ku Brothers – 51%

Julius Baer – 5.7%

Lembaga Tabung Haji – 4.9%

Public small cap fund – 4.5%

EPF – 1.2%

Minority shareholders – 32.7%

According to insiders, KSL has started to open up to meet fund managers and there will be an upcoming first investor meeting held early next month. This sounds like another IFCA when they started to meet investors and have briefing on their quarter results, and it also shows the willingness of the company to be more transparent compared to years ago where access to the management is tough. That is the reason why RHB has ceased their coverage last year.

(C) Financial analysis

Revenue
As of todate, KSL have well above RM1b unbilled sales and this could easily last them for another year worth of revenue, Kenanga has a forecast of RM985m sales, which I think is achievable, however their revenue for FY2015 is abit too aggresive, a whopping 50% increase worth of sales, at RM1.5b. For me, RM1.2b worth of revenue in FY2015 is an easy target for them given there are alot of new launching and unbilled sales.

PAT

Kenanga has an estimated earnings of RM376m for next year. I prefer to be more conservative, cumulative 9 months of 2014 shows a PAT of RM210m, and I am sure next quarter will be much much stronger as the company still have huge amount of unbilled sales as their Taman Bestari project in Klang take off! Thus, achieving RM300m for FY2014 is fair and in FY2015, with potentially rental to be increase in KSL City and more project launches in Klang, RM330m is my estimate.

Dividend

Dividend of 5cents have been announced to the market! But wait, the question is after the bonus ex or before ex? By doing some checking, I am sure it is actually 5 cents after ex-bonus, because bonus issue will happen before 31 December 2014 and the dividend will be paid after bonus! That is actually 10cents, which works out to be 8.9% yield yearly? A 60% profit payout ratio, too generous but yet, this shows that the share price could potentially reach RM8 to justify a 5% yield!

Gearing

Given they have 4.5million treasury shares! That alone is RM20m cash! A possible another round of special dividend?

(D) Valuation

If you think that KSL has risen a lot, maybe you should take a look at E&O ‘s earnings at only RM180m, which is 30%-40% lower than what KSL will be doing, and yet E&O enjoy higher market capitalization due to more coverage and more ownership by institutional investors. If KSL has the equal coverage and stronger name, it could have trade close to RM6-7 by now.

To be conservative, I am just using a target FY2015 P/E of 9x, which is very much lower compared to its peers, UOA is trading at 9.5x P/E while Titijaya, a smaller company compared to KSL, is trading at 9.5x P/E as well.

Of course this is just using P/E as a guide, but according to Kenanga, KSL's RNAV is a whopping RM13.60!!! And typically, mid-cap property developers is trading at about 30-40% discount against their RNAV, if you use the same benchmark, KSL should be trading at a range of RM8.16 - RM9.52!!!

(E) Technical analysis

KSL is poised to test RM4.70 in a few days, and a break above RM4.96, will send the stock into unchartered territory. Volume has also decrease substantially, showing the end of consolidation and there might be a new spark coming soon.

S1: RM4.35, S2: RM3.74

R1: RM4.70, R2: RM4.96, R3: ??

(F) Risk reward ratio

(i) Upside return of 42% - By using P/E of only 9x, KSL should be valued at RM6.42.

(ii) Downside risk of 7% – 3% below support(RM4.35) at RM4.23

I am very confident that KSL will hit RM5 easily.

R/R ratio: 6 times.

(G) Rerating factors/ Catalysts

(i) 1-1 bonus issue's ex-date which will be announced soon, the company has more than a BILLION reserve, and doing another two times 1-1 bonus will be no issue for them

(ii) First quarterly dividend of 10cents (yield of  8.9%) after 3 years of accumulating landbanks, and the company also offers dividend reinvestment plan for shareholders to reinvest their dividends back into the company as shares.

(iii) Potentially having more landbanks than the current 2,100 acres

(iv) No research house covers this stock except Kenanga, which wrote a short report but not coverage on KSL

(iv) High Speed Rail between Singapore and Malaysia will potentially increase the value for lands especially in Johor

(v) Highest PAT margin listed property developer in Malaysia, undervalued property counter who has a GDV of RM40b!

(vi) Potential unlocking its KSL City value by structuring a REIT, a billion ringgit increase in NTA?

(vii) Possibly a special dividend RM0.05 per share coming after selling their treasury shares?

Cheers. With this upcoming Q3 results, you would know how strong KSL's earnings are. You do not want to wait till the announcement of ex-bonus date and the price might jump another 20-30cents. Full year of RM300m profit is certainly not an easy feat for property developers and this is a stock that I will certainly consider to have it in my portfolio during this time of uncertainty! KSL-WA offers 70% upside here and KSL-CB, which has the lowest premium among all call warrants, also offers about 70-120% depends on its premium. Do watchout for opportunity or weakness to buy on Monday/Tuesday because of the big O&G selldown.

http://klgemseeker.blogspot.com