Keong Hong Holdings Limited - DBS Research 2017-12-05: Too Cheap To Ignore

Keong Hong Holdings Limited - DBS Vickers 2017-12-05: Too Cheap To Ignore KEONG HONG HOLDINGS LIMITED 5TT.SI

Keong Hong Holdings Limited - Too Cheap To Ignore

  • Construction cum property development and investment poised to ride on the potential upturn in the Singapore property market.
  • Venturing into hospitality and commercial properties to expand portfolio and build recurring income.
  • Trading at exceptionally low PE despite healthy orderbook ahead.
  • Fair value of S$0.75 based on 5.5x FY18F PE, 50% discount to peers.



THE BUSINESS


Construction cum property development and investment.

  • Keong Hong’s principal activities include building construction, property and hotel investment and development.

Leveraging on the potential upturn in the Singapore property market. 

  • The Singapore’s 3Q17 private residential price index registered its first increase after 15 consecutive quarters of decline. The property market recovery is expected to continue.
  • With rising demand for property, construction companies should also benefit from this rising trend.

Expanding portfolio; building recurring income. 

  • To expand its portfolio and to grow a sustainable source of cash flows and recurring income, Keong Hong has ventured into hospitality (e.g. hotels in Maldives) and commercial properties. 
  • Keong Hong is also seeking to increase its investment in overseas markets to mitigate the impact from the volatile construction segment.


THE STOCK


Trading at exceptionally low PE despite healthy orderbook ahead. 

  • Keong Hong is currently trading at only 4.3x PE based on FY18F earnings. This is at a steep discount of about 60% to its peers.

Fair value of S$0.75. 

  • Given the healthy orderbook and investments in residential, hospitality and commercial segments, we believe a 5.5x FY18F PE valuation is fair, based on 50% discount to peer average, given its limited visibility beyond FY19F as the majority of its projects should be completed by FY18F/FY19F. 
  • Our fair value works out to S$0.75 per share, which translates to an upside of 26% from the current price.
  • Risks: Lumpy construction contracts, economic slowdown.


REVENUE DRIVERS 


Construction cum property development and investment.

  • Keong Hong was first listed on the Catalist Board of SGX in December 2011 and was subsequently promoted to the SGX Mainboard in August 2016. The group’s principal activities include building construction, property and hotel investment and development. 
  • Its building construction services include a broad range of residential, commercial, institutional, industrial and infrastructural projects for both private and public sectors. The group has property and hotel development and investment projects in Singapore, Vietnam, Japan and Maldives.
  • One of Keong Hong’s strategy is to partner with reputable property developers and owners to jointly undertake residential development projects. This enables the group to share resources with business partners and manage business risks associated with the property development projects.

Healthy orderbook. 

  • Keong Hong’s orderbook stood at S$344m as at 30 September 2017, to be recognised over the next two financial years, based on percentage of completion. These include un-billed revenue from:- 
    1. Parc Life – about 80% sold; expected TOP 2Q 2018; 
    2. Seaside Residences – about 70% sold; expected TOP 2020.
    3. Raffles Hospital Extension – about 40% balance of total S$107.5m contract to be recognised.
    4. Pullman Maldives Maamutaa Resort - about 70% balance of total S$100m contract to be recognised.


KEY OPERATING ASSETS 


Property Development and Investment 

  • Keong Hong made its maiden foray into property development in Singapore in 2012 through a joint venture with Frasers Centrepoint Limited to develop Twin Waterfalls Executive Condominium (“EC”).
  • Its subsequent residential developments include SkyPark Residences EC, The Amore EC, Parc Life EC and Seaside Residences.

Hotel Development and Investment 

  • Keong Hong ventured into hotel development and investment in 2013 with its two resort developments in Maldives, Mercure Maldives Kooddoo Resort and Pullman Maldives Maamutaa Resort.
  • In Singapore, the group owns a joint hotel and mixed-use development project - Hotel Indigo Singapore Katong, Holiday Inn Express Singapore Katong and Katong Square.
  • Other investments overseas Keong Hong purchased a commercial property in Honmachi, Osaka, Japan, and is in the process of acquiring a second property in Osaka.
  • It also owns a 15% stake in a residential development in Nha Be, Ho Chi Minh City, Vietnam.


GROWTH PROSPECTS 


Leveraging on the potential upturn in the Singapore property market. 

  • Singapore’s 3Q17 private residential price index registered its first increase after 15 consecutive quarters of decline, with all segments – private and public residential, office and retail – turning up. The property market recovery is expected to be gradual in the next 12 months with more transactions across all segments of the real estate market. 
  • Factors driving the recovery include
    1. low unsold inventories,
    2. affordability as Singapore’s housing-to-income ratio is among one of the lowest globally, and
    3. increasing demand from foreigners.
  • With the increasing demand for property, construction companies should benefit from this rising trend. Furthermore, the recent enbloc fever is also another contributing factor to the rising demand for property.

Expanding portfolio; building recurring income. 

  • To expand its portfolio and to grow a sustainable source of cash flows and recurring income, Keong Hong has ventured into hospitality and commercial properties. Keong Hong is receiving recurring rental income from its investment in a commercial property in Osaka, Japan. It is in the process of acquiring a second property in Osaka.
  • Keong Hong is also exploring hotel investment opportunities in other countries such as Malaysia, Indonesia and Australia. 
  • Keong Hong plans to grow the contribution from hotel development and investment to form a more substantial portion in order to mitigate the impact from the volatile construction segment.

Seeking growth by expanding to overseas markets. 

  • Keong Hong is seeking to increase its investment in overseas markets, both mature and emerging markets, for business expansion and also to diversify risks. Mature markets are generally more stable while emerging markets have more growth potential. 
  • So far, Keong Hong has investments in both young and growing emerging markets (Vietnam and Maldives), and also mature markets (Japan).


MANAGEMENT & STRATEGY 


Managed by veterans in the industry. 

  • Chairman and CEO, Mr Leo Ting Ping, Ronald has more than 40 years of experience in the civil engineering industry. He grew Keong Hong’s business from a subcontractor into an established design and build main contractor of BCA A1 Grading. He also led the group to its IPO on the Catalist board of SGX in December 2011. Keong Hong was subsequently promoted to the SGX Mainboard in August 2016.
  • Mr Leo is supported by Mr Er, who is also a veteran in the construction industry and has been with the group since 1996.


VALUATIONS 


Trading at exceptionally low PE despite healthy orderbook ahead. 

  • Keong Hong is currently trading at only 4.3x PE based on FY18F earnings. This is at steep discount of about 60% to its peers.
  • Going forward, its construction orderbook of S$344m as at 30 September 2017 should provide the group with a sustainable flow of activities through the end of financial year 2019. Furthermore, for FY18F, Keong Hong is expected to book its investment for its 20% stake in Parc Life executive condominium, which should receive TOP in 2Q 2018. It also has a 20% stake in Seaside Residences, which is expected to receive TOP in 2020.
  • Given the healthy orderbook and investments, we believe a 5.5x FY18F PE valuation is fair, based on 50% discount to peer average of about 11x, given its limited visibility beyond FY19F as the majority of its projects should be completed by FY18F/FY19F. 
  • Our fair value works out to S$0.75 per share, which translates to an upside of 26% from the current price.

FY17 earnings skewed by exceptional gains. 

  • Keong Hong turned in a net profit of S$70.2m, a 86.4% y-o-y improvement, mainly due to an exceptional gain of S$49.8m on re-measurement of investment to fair value. Without this exceptional gain, the group would have registered operating profit of S$20.4m as compared to S$37.7m in FY2016. 
  • The decline in operating profit was mainly due to the absence of lump sum profits from property development.



Return *: 1 
Risk: Moderate 
Potential Target 12-mth* : S$ 0.75




Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-12-05
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.75 Same 0.75

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.


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