Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit of RM150m was within our expectation, accounting for 55% of our full-year estimates.

As for its property sales, no information has been disclosed yet and we do not rule out potential disappointment given the current challenging market conditions.

Dividends

Single-tier interim dividend of 2.0 sen was declared which is DRP applicable. We are expecting more dividends to be declared in 2H15, as we are looking at 11.4 sen for the fullyear that implies net dividend yield of 8%.

Key Results Highlights

YoY, 1H15 core net profit increased by 7% on the back of revenue growth of 3%, coupled with some improvements in EBITDA margins to 46.6% (+1.5ppt). The improvement in revenue was well supported by growth from most divisions, i.e. property development (+3%), and car park operations (+52%), while the margin improvements were driven: by (i) property development (+2.5ppt) on better product margin mix, (ii) property investment (+5.4ppt) which saw higher rental reversions and cost control measures.

QoQ, its 2Q15 core net profit saw a sharp decline by 18%, underpinned by lower revenue (-33%). The main drag on its revenue was from its property development division due to slower progressive billings from on-going projects in Johor and Klang Valley. As for its property investment division, it managed to record 4% growth in operating profit albeit a slide in revenue (-2%) mainly due to the improvements in operating margins due to better cost control measures taken by management.

Outlook

We expect the operating environment for the property sector to continue to be challenging, especially in Johor, due to concerns of oversupply of high-rises in the Iskandar region. However, we still believe that KSL is still highly competitive in Johor given their ability to price their products more competitively compared to other players in the affordable segment or offer attractive packages for first homebuyers due to their low land costs. That aside, they also enjoy strong (26% of group income) recurring income, which is one of the highest amongst developers in our coverage, and high development margins. Furthermore, their balance sheet is light at 0.01x net gearing. These factors are plus points in the currently challenging property environment.

Change to Forecasts

No changes to earnings. We estimate that its unbilled sales are c.RM700m which provides the group 1–2 years of visibility.

Rating

Maintain OUTPERFORM

Valuation

We reiterate our OUTPERFORM call and TP of RM2.15 based on 70% discount to its FD RNAV of RM7.07. The discount of 70% is considered one of the steepest applied for property players under our coverage. The current TP still implies: (i) 6.8x FY16E PER which is close to smallmid cap peers’ average of 6.3x, (ii) coupled with an implied dividend yield of 5.3% which is inline with small-mid cap peers’ average of 5.2%.

Risks to Our Call

Weaker-than-expected property sales. Higher-thanexpected sales and administrative costs. Negative real estate policies. Tighter lending environments.

Source: Kenanga Research - 1 Sep 2015