We recenty attended a briefing held by KSL and it appears that the group is guiding for a more conservative sales target, leading us to trim our FY15-16E sales by 8.5%-7.0%. On the bright side, the group’s earnings will be buoyed by strong recurring income (30% of EBIT per annum) and RM847.0m of unbilled sales. We are reiterating our OUTPERFORM call on KSL with an unchanged Target Price of RM2.48 on an unchanged discount factor of 65% to its FD RNAV of RM7.07, as its valuations remain attractive. Currently, KSL is trading at only 6.4x-5.8x FY15-16E Core PERs vis-à-vis peer’s average of 10.2x-10.3x, coupled with a dividend yield of 6.3%, which is superior compared to its peers’ average of 3.9%.

A slow beginning. For 1Q15, KSL only managed to register RM149.9m worth of sales, making up only 18% of our full-year estimates of RM832.1m. However, this industry-wide trend is not surprising with 54% of developers under our coverage also missing targets or behind in sales. The weaker-thanexpected sales were mainly still due to: (i) tight lending environment, (ii) less new launches during the quarter (only RM14.0m worth of new launches in 1Q15) as management takes a more conservative view on the market. Just like its competitors, most of its planned launches totalling RM700.0m are mostly skewed towards 2H15, and are mainly in the affordable (RM500.0k– RM600.0k per unit) segment. Positively, its investment properties have seen further margin expansion by 5ppt to 63%, YoY and we believe that it would continue to provide earnings resiliency to the group should its development slows down.

KSL City Mall 2. In the briefing, management highlighted that they intend to grow their recurring income base to further diversify away from overdependence on property development earnings. Hence, they are targeting to launch/commence works on its second property investment asset namely i.e. KSL City Mall 2 by the end of 2015 or early 2016. However, we believe that the timing for the commencement works for KSL City Mall 2 would take place in late 2016 as management have yet to finalise its building plans for the mall, and thus, no guidance on CAPEX. Tentatively, KSL City Mall 2 would be an integrated development comprising a 5-storey retail mall with an estimated GFA of 2 million square feet, 3 blocks of service apartments and a hotel.

Strong balance sheet. KSL’s balance sheet is strong as its net gearing remains relatively low at only 0.03x as of 1Q15. Should the need arises for massive landbanking or to finance the construction of its second investment property, we believe that KSL can easily raise up to RM900.0m with its net gearing climbing up to 0.52x, which is still within our comfortable range of 0.5x – 0.6x.

Weaker sales outlook but margins to remain stable. Post briefing, we lowered our FY15E and 16E sales by 8.5% and 7.0% to RM761.0m (-8.3% YoY) and RM773.0m (+1.6% YoY), 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. Consequently, FY16E core net profit marginally lowered to RM300.0m (-0.7%), while our FY15E core net profit remains unchanged as its well supported by its unbilled sales of RM847.0m which provides the group more than a year of earnings visibility.

OUTPERFORM maintained. Despite a downward revision in sales, we are still keeping an OUTPERFORM on KSL with an unchanged Target Price of RM2.48 that is based on 65% discount applied to its FD RNAV of RM7.07. The applied discount of 65% is wider compared to our sector average of 46% but still lower than the 72% discount for developers that have huge exposure in Johor, as we believe that KSL deserves a slight premium compared to its Johor peers due to its strong recurring income base. That said, valuations remains compelling as it is trading at only 6.4x-5.8x FY15-16E core PERs and with FY15E net yield of 6.3% vis-à-vis its small-mid cap peers’ average of 10.2x-10.3x and 3.9% yield, respectively. 

Source: Kenanga Research - 8 Jun 2015