KSH Holdings

UOBKayhian on 18 Nov 2013

Valuation/Recommendation

• Maintain BUY and target price of S$0.71, derived from our SOTP valuation. Based on Bloomberg’s estimate, KSH has a 12-month target price of S$0.73. 
• Financial results in line with estimates. KSH reported 1HFY14 net profit of S$23.6m (+66.6% yoy) which accounts for 55% of our FY14 forecast. The rise is mainly attributed to increased contributions from property development as share of results of associates’ jumped 359.4% yoy to S$15.4m.
• Cost pressure mounts. Despite the stellar results, we noted that rising labour costs continue to threaten profitability of construction firms such as KSH. KSH saw gross profit margin drop from 16.1% in 1HFY13 to 7.2% in 1HFY14, as old projects with higher margins ended and rise in labour costs eroded profits. Cost overruns in a particular project also impacted bottom-line.

Our View/Outlook

• Strong earnings growth to continue. With locked-in sales from successful property launches, KSH is expected to continue enjoying good earnings growth and visibility. Of its eight launched projects, more than 80% of its units have been sold. Based on current sales, we expect KSH to recognise more than S$100m (>S$0.25/share) of profits over the next five years.
• Township development still in the pipeline. We understand from management that the township development of GaoBeiDian is still in the pipeline, and will be a key project for the group going forward. Gaobeidian New town development is a JV with Heeton and Tee International. Gaobeidian is 82km from Beijing city, and is well connected via rail and expressways. Gaobeidian station lies on the Batong line of Beijing Subway, and is 9 and 11 stations away from Tian’anmen East Station and Beijing International Airport respectively.
• Our view. While sentiment continues to be weak among property counters, we believe KSH offers value to investors looking for companies with good earnings growth and visibility for the next few years. KSH’s stable dividend policy also ensures investors get a piece of its growing pie. Assuming KSH maintains its FY13 dividend of S$0.025/share, this will translate to an attractive yield of 5%. The company has already announced an interim dividend of S$0.0125/share. The stock has since found some support near its book value of about S$0.47.