1Q16 core net profit of RM43.4m came in within our expectation, accounting for 22% of full-year estimates. No dividend declared as expected. No sales figures disclosed. Property outlook in Johor remains challenging due to oversupply issue of high-rise from Chinese developers. Maintain UNDERPERFORM with a lower Target Price of RM0.99 (from RM1.18) based on a lower 5.0x FY16E PER (from 6.0x).

Within. 1Q16 CNP of RM43.4m met expectations, making up 22% of our full-year estimate. No indication on its sales figure, but we believe it could be below our expectation of RM349.9m as the operating environment in the property market remains challenging, especially in Johor.

Recovery in billings. 1Q16 CNP improved by 375% QoQ, underpinned by 61% growth in revenue. The improvement in revenue was mainly driven by better billings from its on-going property development projects, which resulted in higher development revenue (+117% QoQ). Likewise, its investment properties operating profit dropped by 14% QoQ, which could be due to seasonality. 1Q16 CNP dropped sharply by 47% YoY in tandem with the 42% slump in revenue, mainly due to lower progressive billings from its development projects which we believe was due to slower sales and the absence of mega project launches last year.

Outlook. We do not expect the challenging operating environment in the property sector to see any improvement in the near term, especially in Johor due to the oversupply situation of high-rise projects coming from Chinese developers. We believe the slow demand for high-rise projects in Johor will continue to have a negative impact 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 repositions its launches to landed residential projects over high-rises.

No changes to earnings, but… While we make no changes to our FY16-17E earnings, we reduced our FY16-17E dividend pay-out ratio of 40% to nil as the company did not honour its dividend policy for FY15.

Maintain UNDERPERFORM with lower TP. We continue to reiterate our UNDERPERFORM call on KSL with a lower Target Price of RM0.99 (from RM1.18) which is based on a lower 5.0x FY16E PER (from 6.0x) with no changes to our earnings estimates. Our applied PER is based on the lower range of small-mid-cap peer’s Fwd PER of 5.0x-9.0x. Our major concern is still on the oversupply of high-rise situation in Johor coupled with the weak property market sentiment. At our current Target Price of RM0.99, it implies 86% discount on its RNAV of RM7.07, which is at its peak. Risks to our calls include better-than-expected property sales, lowerthan- expected sales and administrative costs, positive real estate policies, improvements in lending environments, and resumption in dividend payment.

Source: Kenanga Research - 27 May 2016