9M16 core net profit of RM150.5m was within expectations, accounting for 76% of our full-year estimates. No property sales data was available. As expected, no dividend was declared. No changes to FY16-17E core earnings. Maintain UNDERPERFORM with an unchanged Target Price of RM0.99 based on 5.5x FY17E PER.

Within expectation. 9M16 CNP of RM150.5m is in line with our expectation, accounting for 76% of our full-year estimate while there is no consensus available. No dividends declared as expected. Property sales data are not available, while we are expecting property sales of RM349.9m for FY16.

Results review. 9M16 CNP saw sharp decline of 26% underpinned by 23% decrease in revenue as a result of lower progressive billings for its property project attributable to weak property sales due to the challenging market environment, especially in Johor.

QoQ, its 3Q16 CNP picked up with an improvement of 8% backed by strong revenue growth of 18%. The revenue growth was driven by its property division revenue, which grew 24% driving its property operating profit to increase 13% despite 4ppt decline in operating margin of 43%. We believe that the boost in property revenue could be from the completion and handover of some of its projects.

Outlook. We continue to believe that the challenging operating environment in the property sector will persist in the near-term, especially in Johor due to the oversupply situation of high-rise projects coming from Chinese developers. That said, we are also concerned on KSL’s move in targeting the high-end segment away from affordable housing in Johor, as we believe that the slow demand for high-rise projects in Johor will persist.

Keeping FY16-17E earnings. Post earnings, we make no changes to our FY16-17E CNP of RM198.0-174.0m.

Maintain UNDERPERFORM. We maintain our UNDERPERFORM call on KSL with an unchanged Target Price of RM0.99 based on 5.5x FY17E PER. Our applied PER is based on the lower range of small-mid-cap peers’ Fwd. PER of 5.0-7.0x. At our current Target Price of RM0.99, it implies 86% discount on its RNAV of RM7.07, which is at its peak.

Upside risks include higher-than-expected sales and lower administrative costs, positive real estate policies, improvements in lending environments, and resumption in dividend payment.

Source: Kenanga Research - 29 Nov 2016