Analysts advise on accumulating KSL stocks now

KUALA LUMPUR: Analysts are advising investors to accumulate KSL Holdings Bhd (KSL) now given that they believe the stock has good return with deep value.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), since its first recommendation on KSL six months ago, the group has registered a decent total return of 13.4 per cent (from RM1.94) outperforming KLCI’s negative return of 3.7 per cent in the same time period.

“We reckon that the steady share price performance was well supported by its earnings growth trajectory coupled with its attractive share price valuation,” Kenanga Research said.

That aside, the research arm said that the stock is also gradually regaining investors’ confidence through a bonus issue exercise and resumption of dividends.

To recap, Kenanga Research noted that KSL has completed a one-for-one bonus issue and also resumed its dividend payment by paying out a five sen (ex-bonus) interim dividend to its shareholders in the past six months.

“While KSL’s share price performance might not be as impressive compared to other OR stocks under our stable, we believe this would be the right time to collect this stock in the property sector,” it said.

The research arm views KSL as a cheaper and safer entry to the property sector due to its superior margins and pricing flexibility, earnings diversification through strong recurring incomes, severely undervalued investment properties and compelling valuation vis-à-vis its peers. Hence, Kenanga Research is initiating coverage on KSL with an ‘outperform’ call.

According to the research arm, the group’s land cost is relatively low as most of its Johor landbanks are acquired back in 2002 to 2007, allowing KSL better pricing flexibility to position themselves comfortably in the affordable market segment with different products while maintaining its decent margins.

It noted that KSL’s three-year operating income margins averaged at 42.2 per cent, which is far superior to the overall developers’ three-year average operating margins of 25.2 per cent.

Kenanga Research further noted that KSL’s investment properties in Johor have done relatively well, reporting segmental operating profits of RM107 million in finan- cial year 2013 (FY13) or a two-year compound annual growth rate (CAGR) of 85 per cent.

“It makes up a third of their income and helps provide some earnings safety, cushioning the impact from slower sales, should the property market remain soft,” the research arm added.

Kenanga Research said that KSL’s investment property assets are deeply undervalued by RM1.55 billion considering FY15E operating income of RM144 million and conservative seven per cent cap rate which yields a valuation of RM2.05 billion.

If they do revalue their assets, the research arm noted that it could raise their book value of equity value per share (BV/sh) by 104 per cent to RM3.90, while further strengthening their balance sheet.