News  Yesterday, KSL announced that they have put in place a dividend payout policy of a minimum 40% of its core net profit (ex-fair value) subject to the several factors (refer below). The said dividends would also be eligible for the option of reinvestment by shareholders under the existing Dividend Reinvestment Plan (DRP).

Comments  Based on the minimum payout ratio of 40%, it would translate into a higher NDPS of 13.8 sen (div. yield of 6.4%) vis-à-vis our earlier estimates of 10.4 sen (div. yield of 4.8%) for FY15 that is based on a payout assumption of 30%.

 We were not surprised with the move as management had previously highlighted this during their recent analysts’ briefing that was held on 06/03/15. However, we are positive as management is walking the talk by showing their commitment in rewarding shareholders.

 However, we highlight that the minimum payout of 40% is subject to the factors outlined in their announcements i.e. financial performance, cash flow requirements, availability of distributable reserves and tax credits, future operating conditions, as well as future expansion, capital expenditure and investment plans.

Outlook  While the sector is expected to be challenging, especially in Johor, we continue to believe that KSL remains highly competitive in Johor given their ability to price their products more competitively than market or offer highly attractive packages for first-time homebuyers due to their low land costs. They also enjoy strong (26% of income) recurring income, which is one of the highest amongst developers, and high development margins. These factors will help buoy its earnings relatively better than pure developers, which is a big plus in the currently challenging property market.

Forecast  After their last briefing, we opted to conservatively maintain our dividend payout assumption at 30%. While there are no changes to our FY15-16E core net profits, we are bumping up our FY15-16E net dividend per share by 33% higher to 13.8 sen and 15.4 sen, which imply net dividend yields of 6.4%-7.1%.

Rating Maintain OUTPERFORM

Valuation  We are reiterating our OUTPERFORM call on the stock and valuation with an unchanged Target Price of RM2.48 based on 65% discount to its FD RNAV of RM7.07. The applied RNAV discount is a lot steeper compared to the sector’s average of 44%, but is similar to the FD RNAV discount rate of 65% applied on UEMS, given that most of its development projects are also heavily concentrated in Johor. Nonetheless, it remains attractive as it is trading at only 6.2x FY15E PER vis-à-vis its peers’ average of 8.0x, coupled with a decent net dividend yield of 6.4% compared to its peers’ average of 5.1%.

Risks to Our Call  Weaker-than-expected property sales.

 Higher-than-expected sales and administrative costs.

 Negative real estate policies.

 Tighter lending environments. 

Source: Kenanga