Back in our "sights". KSL has been relatively quiet in terms of media and analysts’ coverage over the last two years even during the Iskandar Malaysia buzz when KSL was chalking up FY11-13 core earnings CAGR of 52%. Of late, the company has begun to open up to the market with an article published in The Star titled “KSL strategy pays off” dated 16/8/14.

Owner of c. 2100ac landbank, of which 78% is located in Johor while the balance is mostly in Klang. Their landbanks are mainly township in nature i.e. landed residential. KSL managed to secure a lot of approvals for high-rise developments (min. of 4x plot ratio) prior the imposition of new floor prices for foreign buyers of RM1m/unit. The group has shifted towards this strategy amidst a challenging Johor landscape as they are still targeting young/local buyers with units being priced between RM500-700k/unit. They also enjoy historically low land cost, which enables pricing flexibility or better margins.

Severely undervalued at 27x GDV/mkt cap ratio. We estimate that KSL’s total GDV could amount to c. RM40b and this implies GDV/market cap ratio of 27x, which highlights its gross undervaluation compared to peer’s 10-11x. Its war chest can provide up to 17 years’ visibility, which is significantly higher than typical developers’ visibility of 7-10 years.

Investment properties severely undervalued by more than RM1b. KSL City Mall and other investment properties (Giant@Nusa Bestari, Giant@Muar, KSL Resort) have done well, reporting segmental operating profits of RM107m in FY13 or a 2-year CAGR of 85%, which is a mismatch to its net book value of RM433m. The biggest driver is KSL City Mall and we gather that occupancy is healthy at >90%. Assuming a very conservative 7% cap rate on FY14E segment EBIT, their investment properties should be worth RM1.79b! We believe the group will eventually consider REIT-ing its investment properties once it reaches a critical size. The group has a very light balance sheet of 0.07x which will help fuel their recurring income ambitions.

Very attractive vis-à-vis peers. We estimate FY14-15E core earnings of RM301m-RM376m (62%-25% YoY) on the back of record high unbilled sales of RM1b, FY14-15E property sales of RM1.3b-RM1.6b (30%-23% YoY) and 15% YoY growth p.a. in investment property income. KSL will be trading at FY14-15E core PER of 5.0x-4.0x which is attractive against its mid-cap peer average of 9.0x-8.1x. We would also like to point out that (i) KSL’s earnings growth is also stronger than its peers, (ii) developers that deliver more than RM300m core earnings annually are typically large cap developers with a minimum market cap of RM3b.

More goodies to come? After a 3-year lull without dividend, we reckon that KSL may consider rewarding shareholders since they are opening up to investors. Assuming a conservative 20% pay-out, this translates to FY14-15E DPS of 15.6-19.5 sen or yield of 4.0%-5.0% which is comparable to its peers. Furthermore, the group has RM1.1b of distributable reserves which is more than sufficient to provide investors with 2-3 rounds of 1-for-1 bonus issuance. We believe the group may look into such options to reward shareholders, while improving the liquidity of their share base, which only consists of 386m shares.

FV of RM6.63 based on 50% discount to our FD RNAV of RM13.26. Our RNAV is driven by DCF of future development profits (RM40b GDV @ 20% net margin) at 11% WACC. We have also re-valued its investment properties based on the assumptions above. The applied RNAV discount is steeper than our average 30% applied under our coverage; this is to take into account the possibility of market’s cautious perception of Johor. Our FV implies FY14-15E core PER of 8.5x-6.8x which is still cheaper than its mid-cap peer averages. Trading BUY.

Source: Kenanga