KSH Holdings

UOBKayhian on 30 Jul 2013

We initiate coverage with a BUY with a target price of S$0.71, representing a 29.1% upside. With locked-in sales from its successful property launches, KSH is likely to enjoy good earnings visibility over the next five years. As an established contractor, KSH continues to replenish its orderbook with consistent contract wins with a comparative favourable margin compared to peers. Strong earnings and free cash flow (FCF) support KSH as a dividend play with a current dividend yield of 4.5%.

Investment Highlights

• Strong earnings visibility. Through its JVs, KSH has interest in 13 local property development projects. Based on KSH’s existing (eight launched) projects and current sales, we conservatively estimate KSH to recognise a profit of about S$124.6m (S$0.32/share) over the next five years. In addition, KSH’s 45% interest in its Beijing property development project, Liang Jing Ming Ju (LJMJ) Phase 4, is expected to contribute very positively to earnings for FY16. We estimate a profit of S$32m (S$0.08/share) for a fully sold LJMJ, which is expected to be launched by 3Q13. 

 

• Quality contractor with a sturdy portfolio. KSH is a Building and Construction Authority (BCA) A1 graded main contractor with over 30 years of operating history. With an established track record, KSH has been able to command a higher PBT margin from its construction arm (12.7% vs peers’ average of 10.2%) and constantly replenishes its orderbook. As at 30 Apr 13, KSH maintained a strong orderbook of S$446m, of which more than half (S$233.6m) was awarded in 2013.

• A potential source of firepower. KSH’s principal investment property is Tianxing Riverfront Square (TRS), a 36-storey retail and grade A office building at the heart of Tianjin’s CBD. While rental yield for TRS is at market rate, we believe KSH’s 69% stake in TRS may become a potential source of firepower for the company’s future developments. As at 31 Mar 13, TRS had a fair value of S$97.6m. Given TRS’s ideal location and proven occupancy track record, we believe KSH can easily monetise the property when the opportunity arises. 

• Dividend payout that has more room to grow. KSH has a laudable history of rewarding shareholders with dividends. Given its strong FCF and low payout ratio, we believe KSH is capable of maintaining or increasing its dividends going forward. In the past five FYs, KSH has a payout ratio of 21.8-44.0%. Assuming a conservative payout of 25% for FY14, it will translate to a dividend of 2.7 S cents and an attractive yield of 4.9%.