KSL’s 2Q13 results came in above our  and  market  expectations.  The strong earnings were mainly driven by higher progress billings from the ongoing  projects  in  Iskandar,  especially  in  Johor  Bahru.  Meanwhile, income  from  investment  properties  remained  stable.  We  maintain  our NEUTRAL  rating  and  MYR2.21  FV.  The  sector  outlook  is  increasingly challenging due to concerns on economic and regulatory risks. 

- Above  expectations.  KSL’s  2Q13  results  beat  our  and  market expectations, on an annualised basis. The sequential growth in earnings was  mainly  driven  by  strong  progress billings  from  the  ongoing projects in  Iskandar,  such  as  Taman  Nusa  Bestari  and  Taman  Kempas  Indah. The  take-up  rate  for  its  projects  in  Johor  Bahru  was  also  higher. Meanwhile,  revenue  from  the  shopping  mall,  hypermarkets  and  hotel remained stable. As expected, no dividend was declared.

- Margin  dropped  slightly  but  not  a  concern.  2Q13  EBIT  margin contracted  to  42%  from  49%  in  the  previous  quarter.  This  could  largely be  due  to  the  timing  of  its  construction  progress.  We  expect  margin  to stabilise at around 40-45% going forward.

- Forecasts.  We  make  no  changes  to  our  forecasts  at  this  juncture, pending an update from management. Accessibility to management has been  very  difficult,  and  we  believe  an improvement  in investor  relations will  help  the  company  better  realise  its  intrinsic  value.  KSL  has accumulated  a  quality  pool  of  assets,  which  provide  sustainability  in earnings.

- Maintain NEUTRAL. We maintain our NEUTRAL rating. Our fair value is kept at MYR2.21, based on a 50% discount to RNAV. While the Iskandar region  is  still  seeing  strong  buying  momentum,  we  believe  the  supply issue will arise over the short term. KSL’s township in Bandar Bestari Klang will, however, mitigate the risk.

Source: RHB