Period

4Q15/FY15

Actual vs. Expectations

KSL’s FY15 core net profit of RM211.5m was disappointing, accounting for only 78% of our full-year estimate of RM271.7m. Not widely tracked, there is no consensus estimate. The main disappointment stems from the poor performance of its property development division, which registered losses of RM7.0m, coupled with a slower-thanexpected progressive billing recognition.

Sales figures are not available yet, but judging from its poor financial performance, we believe that it would have disappointed our expectation of RM579m sale by a wide margin.

Dividends

No dividend was proposed. However, should KSL keep to its dividend policy pay-out ratio of 40% of core net profit, we would be expecting a full-year dividend of 8.9sen. Nonetheless, it would still below our initial expectation of 11.4sen for FY15.

Key Results Highlights

YoY, FY15 core net profit excludes fair value gain of RM56.1m and further weakened17% due to the decline in revenue (-14%), coupled with margin compression whereby its pre-tax margin was down by 4ppt to 49.6%. While the lower revenue registered was mainly due to slower progressive billings from its on-going developments, the compression in margins was attributable to higher sales and administrative costs (+20%).

QoQ, its 4Q15 core net profit saw a drastic decline by 82%, also due to similar reasons stated above, whereby its property development division registered an operating loss of RM7.0m vis-à-vis an operating gain of RM47.5m in 4Q14. We believe that the losses were driven by the slump in revenue (-53%) and higher sales and administration costs (+38%) for the marketing of its property projects.

Outlook

We expect the operating environment for the property sector to remain challenging, especially in Johor. The slower-thanexpected demand in the high-rise market had impacted negatively on KSL’s sales despite their competitive pricing in the affordable segment in that region. Going forward, we reckon that it will be even more challenging unless KSL repositionsits launches to landed residentials over high-rises.

Change to Forecasts

Given the weak outlook for high-rise demand in Johor, we slashed our FY16 sales by 40% to RM350m. Subsequently, we also reduced our FY16E core net profit by 28% to RM198.0m.

Rating

Downgrade to MARKET PERFORM

Valuation

Post adjustment in our earnings amid growing concerns over the demand for high-rise development in Johor, we are downgrading KSL to MARKET PERFORM from OP with a lower Target Price of RM1.18 based on an unchanged 6.0x FY16E PER (previously, OP; TP:RM1.72). At our current Target Price of RM1.18, it implies 83% discount or close/at to peak discount levels to its RNAV of RM7.07.

Risks

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

Revision in dividend policy.

Source: Kenanga Research - 29 Feb 2016