We came back from KSL’s briefing feeling negative on the Johor property market prospect given the weaker sales numbers. Hence, we lowered our FY16E core net profit by 8% to RM276.5m after reducing our FY15-16E sales target by 24% to RM579.8-586.3m. That said, we also downgraded our Target Price to RM1.72 based on 6x FY16E PER, which implies a 77% discount to its RNAV of RM7.07 (previously, RM2.15) as we switched our valuation methodology from RNAV to Fwd PER. At current levels, its FY16E yields remains attractive at 7.7% vis-à-vis its peer average of 5.9%.

Property sales remain sluggish. For 1H15, KSL only managed to register RM267.7m worth of sales which is below our expectation, accounting for only 35% of our full-year estimate of RM761.0m. However, this industry-wide trend is not surprising as only 14% of developers under our coverage are on track to meeting full-year targets. Its sluggish sales were mainly still due to: (i) tight lending environment, (ii) less new launches during the quarter (only RM61.8m worth of new launches in 1H15) as management remains very cautious on the current market condition. Moving ahead, management is looking to launch affordable properties priced below the RM500k mark, such as its Avery Park @ Taman Rinting with a total GDV of RM139.0m. We gather that the response for the project is still relatively encouraging given that it secured 30% booking just a few days after its launch in early September.

Lowering FY15-16E sales by 24%. In view of slower launches coupled with the challenging property environment in Johor, we slashed our FY15-16E sales by 24% each to RM579.8m (-41%, YoY) and RM586.3m (+1%, YoY), respectively. Consequently, our FY16E core net profit was lowered by 8% to RM276.5m, while our FY15E core net profit remains unchanged given that it is well supported by its unbilled sales of RM807.8m that would provide the group more than a year of earnings visibility. We would like to remind investors that c.30% of income is still driven by their resilient recurring income from its investment properties (e.g. KSL City Mall and Resort), which offers some degree of dividend payout comfort to investors. Despite the reduction in our earnings forecasts, management is comfortable with the minimum dividend policy payout assumption of 40%; we estimate FY15-16E yields of 7.6%-7.7%.

FY16 planned CAPEX of RM500.0m. During the briefing, management indicated that they have already budgeted RM500.0m in FY16 spanning over 3 years for the CAPEX of its upcoming mall namely KSL City Mall 2 in Klang, which management is looking to commence construction works next year upon getting all the necessary approvals from the state authorities. Looking at KSL’s balance sheet, it remains fairly healthy with a net gearing of only 0.01x as of 2Q15, which they can raise another RM950.0m by leveraging up to 0.5x net gearing, should the need arises for massive land banking or to finance the construction cost of KSL City Mall 2.

Maintain OUTPERFORM. Post-briefing, we lowered our Target Price for KSL to RM1.72 pegged to 6.0x FY16E PER, a 10% discount to its small-mid-cap peers’average of 6.6x (previously, RM2.15 based on 70% discount to its RNAV of RM7.07), as we have turned cautious on the property market, especially in Johor. We opt to change our valuation methodology to Fwd PER as investors become more concerned about earnings delivery compared to realisation of developers’ RNAVs. We are applying a 10% discount to its peers’ average given its high exposure in Johor. However, we think 10% is sufficient as the company has a very light balance sheet, targets affordable housing and has strong dividend payout abilities thanks to its recurring income streams. KSL remains an OUTPERFORM albeit the lowered TP as its dividend yield for FY16E remains attractive at 7.7% vs. its peers’ average of 5.9%. At our current Target Price of RM1.72, it implies a 77% discount to its RNAV of RM7.07.

Source: Kenanga Research - 11 Sep 2015