KSH Holdings

OCBC on 21 Sept 2012

Due to a rapid sales pickup at a key project, Cityscape@Farrer Park, we now forecast for FY13 (ending Mar 13) earnings to surge 68%. Similarly, we expect FY14 earnings to increase 73%. We see sustained earnings growth as a key price catalyst ahead, particularly as continued market liquidity seeks out deep value laggards like KSH (0.6x trailing PB, 3x FY13E PE). We also note KSH has been actively buying back shares near current levels – which management views as severely undervalued – and has a mandate to purchase up to a quarter of its free float, with ample cash (S$53m) to do so. Finally, we see a major re-rating as likely imminent given KSH’s transition, over the last two years, from a cash-hoarding contractor to an property player actively managing shareholders’ capital – deploying capital into accretive site acquisitions and returning excess cash via dividends and share buy-backs. Upgrade KSH to BUY as our key small-cap conviction idea. Our FV increases to S$0.50, from S$0.26 previously, as we lower the RNAV discount to 50% to reflect active capital management, better-than-expected real estate execution, and a still resilient construction order book.

Key catalyst: FY13 earnings expected to increase 68% YoY
Due to a rapid pickup in sales at a key project, Cityscape@Farrer Park, from 22% sold as of end Jun12 to ~45% currently, we now forecast for FY13 (ending Mar 13) earnings to surge 68% as progressive recognition begins. Similarly, we expect FY14 earnings to increase 73% to S$53.0m. We see sustained earnings growth as a key share price catalyst ahead, particularly as continued market liquidity seeks out deep value laggards like KSH (0.6x trailing PB, 3.0x FY13E forward PE).

Likely limited downside here: share buybacks and rich dividend
From current levels, we see compelling risk-reward as the price downside appears likely limited. First, KSH has been actively buying back shares near current levels – which management views as severely undervalued – and has a share buy-back mandate to purchase up to a quarter of its free float, with ample cash (S$53m) to do so. Secondly, KSH would likely keep up its dividend, which we see underpinning its share price given an expected yield of 6.1%.

See major re-rating ahead: from cash hoarding to active capital management
Finally, we see a major re-rating as likely imminent given KSH’s transition, over the last two years, from a cash-hoarding construction contractor to an property player actively managing shareholders’ capital – deploying capital into a portfolio of accretive real estate acquisitions and returning excess cash to shareholders via dividends and share buy-backs. In last 12 months, we estimate KSH has deployed an estimated S$160m to six JV projects, of which three we note are led by JV partner Oxley Holdings – a developer with a sharp execution record.

Upgrade to BUY: our key conviction small-cap idea
Upgrade KSH to BUY as our key small-cap conviction idea. We see a confluence of multiple tailwinds ahead for the share price, and our FV increases to S$0.50 from S$0.26 previously, as we lower the RNAV discount for the property segment to 50% to reflect active capital management, better-than-expected real estate execution, and a still resilient construction order book.