1Q17 CNP of RM54.4m came in above expectations making up 31% of our full-year estimates while there are no consensus estimates. No dividend declared as expected. Raised FY17-18E CNP by 19%-16% and upgraded our call to MARKET PERFORM (previously, UNDERPERFORM) with an unchanged Target Price of RM1.30.

Above expectations. 1Q17 CNP of RM54.4m came in above expectation making up 31% of our full-year estimates while there are no consensus estimates. No dividend declared as expected. The outperformance was mainly driven by higher billings from its development division. In terms of sales, no sales figures were provided by management.

Results review. Its 1Q17 CNP registered a growth of 26%, YoY, driven by higher revenue, which increased by 9% coupled with the 6ppt improvements seen on its operating margins to 42% mainly underpinned by its property development division performance. Its property development division registered 12% growth in revenue coupled with 6ppt improvements in operating margin backed by the healthy billing progress of its on-going projects, i.e. Avery Park @ Rinting, Taman Bestari Indah, KSL Residences @ Daya, and Bandar Bestari Commercial City @ Klang. QoQ wise, 1Q17 CNP still saw marginal growth of 1% albeit the sharp decline in revenue (-28%), as the substantial improvement in development margins (+10ppt) managed to offset the impact from the decline in revenue. Notably, it also turned into net cash position from net gearing level of 0.05x previously.

Outlook. While we had been conservative on KSL’s ability to sell high-rise products in Johor due to the stiff competition and oversupply situation due to the Chinese developers, KSL had proven otherwise and performed better than what we had earlier expected. We believe that KSL should be able to sustain its performance if they shift their focus into the landed properties segment in Johor, which commands resilient demand as compared to high-rises.

Raising FY17-18E earnings. Post results, we are raising our FY17-18E CNPs by 19%-16%, after we raised our FY17 sales target by 35% to RM471.6m and also adjusted the timing of our progressive billings.

Upgrades to MARKET PERFORM. Following our upward revision in FY17-18E core earnings, we upgrade KSL to MARKET PERFORM with an unchanged Target Price of RM1.30 with discount of 82% on its RNAV of RM7.07. Our TP implies FY18E FD Core PER of 6.0x, still within its small-mid-cap peers’ Fwd. PER of 5.2-7.3x.

Downside risks include: (i) lower-than-expected sales, (ii) higher administrative costs, (iii) negative real estate policies, and (iv) worsening lending environment.

Source: Kenanga Research - 31 May 2017