FY16 CNP of RM204.6m was within expectations, accounting for 103% of our full-year estimate. No property sales data was available. As expected, no dividend was declared. No changes to FY17E core earnings. Maintain UNDERPERFORM with an unchanged Target Price of RM0.99 based on 5.5x FY17E PER.

Within expectation. FY16 CNP of RM204.6m is in line with our expectation, accounting for 103% of our full-year estimate while there is no consensus available. No dividends declared as expected. Property sales data are not available, but we expected property sales of RM349.9m for FY16.

Results review. FY16 CNP saw marginal decline of 3%, YoY despite flattish revenue, which was mainly due to margin compression from its property development division, which saw 2ppt decline in operating margin to 36%. QoQ, its 4Q16 CNP also declined by 3% despite a strong growth in revenue (+41%) as it was also hit by compression in development margins that was down by 15ppt to 28% coupled with a higher effective tax rate of 31% after stripping out the fair value gains in investment properties.

Outlook. We believe the challenging operating environment in the property sector is here to stay 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.

FY17E earnings maintained. Post results, we make no changes to our FY17E CNP of RM174.0m, and introduce our FY18E CNP of RM177.1m

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 (i) higher-than-expected sales, (ii) lower administrative costs, (iii) positive real estate policies, (iv) improvements in lending environments, and (v) resumption in dividend payment.

Source: Kenanga Research - 28 Feb 2017