Post-briefing, we maintain our neutral-to-negative biased view on the property sector underpinned by the weaker-than-expected sales performance of RM830.0m recorded by KSL in FY14, and we revised our FY15-16E sales downwards by 16.0% for each year, while we also lowered our FY15-16E earnings by 13.0% for both years to RM272m and RM302m, respectively. We have also lowered our Target Price to RM2.48 (previously, RM2.76) as we widened the discount factor on its FD RNAV from 61% to 65%, but are keeping an OUTPERFORM call on the stock as valuation remains attractive, trading at only 6.4x FY15E Core PER vis-à-vis peer’s average of 8.0x, coupled with a potential upside on its net dividend yield of 4.7% as we only assumed a 30.0% payout compared to managements’ guidance of 40.0% from FY15 onwards.

Disappointing FY14 sales. KSL registered disappointing property sales of RM830.0m for FY14, which came below their target of RM1.0b and our estimates of RM986.0m as the conversion of sales was slower-thanexpected. That said, management remains optimistic that they will be able to record c.RM1.0b sales in FY15 given their competitive product pricing strategy that is set below competitors and catering for the mass market in Johor.

Expecting FY15-16 sales to be flattish. Despite managements’ confidence in achieving a sales target of RM1.0b for FY15, we are cutting our FY15-16 sales by 16.0% for both years to RM832.0m respectively, as we expect property sales to be flat at best given the challenging environment in the property market due to the uncertainties caused by the implementation of GST and tight lending environment, especially in Johor given the influx of supplies for high-rises.

Downward revision in FY15-16E core net profit by 13.0%. Following the disappointing FY14 results and weak sales performance, we pushed backed some of the progressive billings, as we deem our previous assumptions to be slightly aggressive coupled with the reduction in property sales for FY15-16E. As such, our FY15-16E core net profit is reduced to RM272.0m (-13.0%) and RM302.0m (-13.0%).

Dividend policy on the way. In the briefing, management reassured that they are formalising a dividend policy which is still pending approval from the board members. Management indicated that they would be paying out at least 40.0% of its net profit in the upcoming dividend payout. However, we continue to assume a dividend payout ratio of 30% for now until the formal announcement is made. At 30.0% payout ratio, we would be expecting a net dividend of 10.0 sen for FY15 implying a net yield of 4.7%.

Maintain OUTPERFORM with a lower TP of RM2.48. Following the reduction in our sales and earnings estimates for FY15-16E, we also lowered our Target Price for KSL from RM2.76 to RM2.48 as we widen our discount factor to 65.0% (previously, 61.0%) to its FD RNAV of RM7.07. The applied RNAV discount is a lot steeper compared to the sector’s average of 44.0%, but it is similar to the FD RNAV discount rate of 65.0% applied for UEMS, given that most of its development projects are heavily focused in Johor. Nonetheless, we are reiterating our OUTPERFORM call on the stock as valuation remains attractive trading at only 6.4x FY15E PER vis-à-vis its peers’ average of 8.0x, coupled with a potential upside on its net dividend yield of 4.7% as we only assumed a 30.0% payout compared to managements’ guidance of 40.0% for FY15. 

Source: Kenanga