Period

3Q15/9M15

Actual vs. Expectations

KSL registered 9M15 core net profit of RM200.5m which is within expectation by accounting for 74% of our full-year estimate.

While there is no sales data available at this juncture, we would not be surprised if its 9M15 sales figure came below our expected full-year target of RM579.8m, under the current market condition. To recap, KSL registered RM267.7m worth of property sale back in 1H15.

Dividends

No dividend was declared for the quarter as expected.

Key Results Highlights

YoY, 9M15 core net profit was down by 5% to RM200.5m on the back of a decline in revenue (-7%). The main drag in revenue was due to slower progressive billings from its on-going property projects. On a positive note, operating profit for its property investment grew to RM67.3m (+3%), despite lower revenue of RM108.1m (-3%), due to the improvement in operating margin of 4ppt to 62%.

QoQ, 3Q15 core net profit saw a drastic decline of 25% to RM50.6m driven by several factors, i.e. (i) decrease in revenue (-15%) as the revenue for both its property development (-18%) and property investment (-3%) divisions slowed down, and (ii) margin compression for both of these divisions by 10ppt and 8ppt, respectively. The decline in revenue for both its property development and investment divisions was mainly attributable to timing of billings recognition. Compression in margins was due to recognition of lower margin projects and potentially higher maintenance costs for its investment assets.

Outlook

The operating environment for the property sector is expected to be challenging in the mid-term, especially in Johor, due to concerns of oversupply of high-rises in the Iskandar region. However, we still like KSL given its competitiveness edge in pricing their products lower than other players in the affordable segment without sacrificing its margins due to its low land cost. 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, its balance sheet remains extremely light at 0.02x net gearing, which is a plus point in a challenging property environment.

Change to Forecasts

No change to our FY15-16E earnings estimates at this juncture. However, should its 9M15 sales come in sharply below than expected; we may consider lowering our earnings estimates. We estimate that its unbilled sales to hover at c.RM800m which provides the group 1–2 years of visibility.

Rating

Maintain OUTPERFORM

Valuation

Maintain OUTPERFORM with an unchanged TP of RM1.72 based on 6.0x FY16E PER or a 10% discount to its small-mid-cap peers’ average of 6.6x; this discount is to reflect our cautiousness on the Johor property market. Nonetheless, KSL remains an OUTPERFORM as its dividend yield for FY16E remains attractive at 7.9% vs. its peers’ average of 5.9%.

Risks to Our Call

Weaker-than-expected property sales. Higher-thanexpected sales and administrative costs. Negative property-related policies. Tighter lending requirements.

Source: Kenanga Research - 30 Nov 2015