KSH Holdings (KSHH SP) - UOB Kay Hian 2016-11-15: 2QFY17 In-line Results; Landmark Contract Win Amid Intact Fundamentals

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KSH HOLDINGS LIMITED ER0.SI

KSH Holdings (KSHH SP) - 2QFY17 In-line Results; Landmark Contract Win Amid Intact Fundamentals

• 2QFY17 results came in within our expectation. The net profit drop was largely due to lumpy recognition in FY16, but it should play catch-up in 2H16. 
• Construction revenue grew on improved margins, while KSH announced a S$139.1m landmark contract win. The robust underlying construction orderbook and pre-sold property project balance provide strong earnings visibility for the next two years. 
• Maintain BUY and target price of S$0.69. 
• KSH is trading at 5.5% FY17F yield and 0.7x FY17F P/B, boasting FY17F net cash of S$76.0m (30.3% of market cap).

RESULTS

2QFY17 results are in line; down yoy due to lumpy recognition. 

• KSH Holdings (KSH) delivered a decent set of 2QFY17 results with no surprises. Net profit fell sharply yoy but this was largely due to lumpy recognition in the previous year. The interim dividend of S$0.0125 is also in line with our expectation.

KSH’s share of associate profit experiencing a temporary decline. 

• The fall in net profit was also partially due to the absence of development profits from its associates compared with the previous year’s contribution from the Sequoia Mansion project in China. This decline should be temporary and we expect its associates’ performance to play catch-up in 2H16.

Construction revenue grew along with improved margins.

• Most notably, its bread and butter construction business continued to perform with growing revenue and improved margins as costs were reined in.

STOCK IMPACT

Landmark contract of S$139.1m boosts orderbook significantly and could open doors. 

• The LOI project is expected to commence in Feb 17. Our channel checks show that this is linked to the mega project, Paya Lebar Quarter which is developed by Lendlease (Not Rated). 
• KSH is currently expected to handle the residential portion of this mega project that consists of seven buildings, including 1m sqft of office space and 340,000 sqft of retail space. The S$139.1m landmark contract will boost KSH’s orderbook significantly and we expect its involvement in this project would bring in more opportunities within the project compound and serve as testament to KSH’s construction capabilities.

Robust orderbook which provides two-year earnings visibility. 

• While KSH reported a construction orderbook of only S$257m as at 30 Sep 16, we estimate its term contract with the National University of Singapore (for a period of two years with an option to extend for another year) would be worth about S$200m. Therefore, its underlying orderbook is estimated to worth about S$450m, and this stretches its construction earnings visibility for another two years.

Earnings further supported by larger pre-sold property pool. 

• In 2QFY17, KSH managed to sell more of its property inventory with approximately 94.2% of its launched units sold (at 92.9% in the previous quarter). Therefore, it has a balance amount of shared revenue of about S$227.5m to be recognised, underpinning the group’s shared profits for the next two years.

EARNINGS REVISION/RISK

Forecasts unchanged as fundamentals remain intact. 

• We keep our forecasts unchanged as the company delivered as expected. Share results from associates will play catch-up in 2H16 as they recognise some of the profits from pre-sold projects. 
• We opine that there are minimum downside risks to our earnings forecasts for the next two years given the strong visibility.

VALUATION/RECOMMENDATION

• Maintain BUY and P/B-based target price of S$0.69. We maintain our view that the stock should trade close to its 3-year historical average P/B of 0.93x due to: 
  1. a brighter outlook with orders returning and clear earnings visibility, 
  2. strengthening balance sheet, 
  3. superior track record and skilled management, 
  4. shareholder-friendly management, and 
  5. sustainable attractive FY17 dividend yield of 5.5%.

SHARE PRICE CATALYST

Better-than-expected dividend payout. 

• While we expect the company to pay at least S$0.03/share in dividends (or a 25% payout) for FY17 and beyond, we do not rule out the possibility of them paying more, given the huge net cash balance they have on hand.

Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-15

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