KSL Holdings Bhd
(Jan 4, RM1.83)
Initiate coverage with outperform rating at RM1.80 with fair value RM2.78: We believe KSL is a rising star among the small mid-cap property players. Having established a strong foothold in Johor, KSL is gradually moving to high potential areas in the Klang Valley. Its most valuable and strategic piece of land currently in the portfolio is the 446-acre tract in Klang that is designated for the development of a township named Bandar Bestari.
Apart from this, the company is gradually moving up the value chain by going into high-end property development — D’Esplanade and D’Embassy @ Jalan Madge. Its flagship KSL City will be the first integrated commercial project in Johor Bahru and comprises a four-storey shopping podium, basement and multilevel car park, two blocks of high-end residential towers and two blocks of hotels. Based on this experience, KSL will move into the luxury segment by putting up low-rise residences this year on its land along Jalan Madge that it acquired last year.
Investment case: (i) a good proxy for Iskandar Development Region play; (ii) a realisable net asset value play — the market value for the 446-acre tract in Klang has appreciated to RM25 to RM30 psf, against KSL’s cost of only RM8 to RM9 psf; (iii) various property launches in 2011 — Bandar Bestari (GDV: RM2.5 billion) — KSL’s first township development in the Klang Valley; One Mutiara — a new township in Johor Bahru (GDV: RM380 million) and D’Embassy @ Jalan Madge (GDV: RM200 million); (iv) ramping up recurring income from property assets — KSL City shopping mall from January 2011; and (v) potential disposal of KSL City shopping mall.
The risks include: (i) delays in launches and approvals; (ii) competition from peers; (iii) regulatory risk; (iv) country risk; and (v) stock illiquidity.
We estimate an impressive three-year earnings compound annual gorwth rate of 23.4%, largely driven by: (i) launch of Bandar Bestari Klang in 2011; (ii) recurring rental income from the KSL City shopping mall; and (iii) the full swing in the construction of KSL City service apartment.
Property sales from its Bandar Bestari, One Mutiara, and Jalan Madge projects will translate into strong earnings at least over the next five years. We initiate coverage on KSL with an “outperform” rating. Based on a 30% discount to RNAV, our indicative fair value is RM2.78, giving an upside of 54%. KSL is our top pick for small mid-cap exposure.
The stock is undervalued, currently trading at a price-earnings ratio of only 7.7 times, against eight to nine times for its small mid-cap peers. — RHB Research Institute, Jan 4
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