KSH Holdings

OCBC on 8 June 2012

The BCA is forecasting a 16% to 34% dip in total construction demand to S$21b-S$27b in 2012, with the bulk of the dip expected to come from lower private demand (S$8b – S$12b in 2012 versus S$16.8b in 2011). KSH has historically been focused on private projects given higher margins, and the weakened outlook would likely put downward pressure on its construction business over the mid-term. With net gearing at a low 4.1% and its expertise in construction, we see KSH well-poised to add value as a JV partner with larger developers. Already we have seen KSH taking stakes in the redevelopment of Hong Leong Garden Shopping Centre, Seletar Garden and 11 King Albert Park. We see execution at KSH’s redevelopment projects to be key drivers for the share price ahead and could offset, to an extent, the weaker private construction outlook. Maintain HOLD rating at an unchanged S$0.25 fair value estimate.

Private construction outlook continues to look weak
While KSH Holdings’ (KSH) order book is currently relatively strong at S$467.0m, we believe the rate of book replenishment could be uncertain ahead. The Building and Construction Authority (BCA) of Singapore is forecasting a 16% to 34% dip in total construction demand to S$21b-S$27b in 2012 from S$32b in 2011, with the bulk of the dip expected to come from lower private construction demand (S$8b – S$12b in 2012 versus S$16.8b in 2011); public demand would only fall marginally to S$13b-S$15b in 2012 from S$15.2b in 2011. This is in line with our view that the domestic residential sector could soften somewhat going forward given persistent macro headwinds from Europe and potentially more property curbs from the government. Since KSH has historically been focused on private construction projects given the higher profit margins involved, we believe that the weakened outlook would likely put downward pressure on its construction business over the mid-term.

En-bloc opportunities to feature ahead
KSH has a strong balance sheet with net gearing at a low 4.1%, and cash and equivalents of S$65.2m. Together with its expertise in construction, we believe KSH is well-poised to add value as a JV partner with larger developers, particularly for those with higher leverage. Already we have seen KSH taking stakes in the redevelopment of Hong Leong Garden Shopping Centre, Seletar Garden and 11 King Albert Park. Looking ahead, we believe en-bloc opportunities for mixed developments with retail components could be interesting propositions for value accretion. We see execution at KSH’s redevelopment projects to be key drivers for the share price ahead and could offset, to an extent, the weaker private construction outlook.

Maintain HOLD at unchanged S$0.25 fair value estimate
Management continues to execute favorably and we understand that KSH is actively seeking order book replenishment. However, given a weaker outlook in the private construction segment and macro headwinds from an uncertain global environment, we maintain our HOLD rating at an unchanged S$0.25 fair value estimate.