KSH Holdings (KSHH SP) - UOB Kay Hian 2017-02-10: Catching Up In 4QFY17

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KSH HOLDINGS LIMITED ER0.SI

KSH Holdings (KSHH SP) - Catching Up In 4QFY17

• KSH Holdings’ (KSH) 3QFY17 results were below our expectation largely due to a timing issue.
• Orderbook visibility remained strong with a total of about S$425m going forward, while construction margins improved 1.6ppt. 
• Associate contributions will pick up in 4QFY17 when the sale of its partial stake in Prudential Towers is completed. 
• Going forward, sales for the Gaobeidian project have commenced, supporting property development profits. 
• Maintain BUY with target price unchanged at S$0.69.

RESULTS

3QFY17 below expectations, largely due to timing issue. 

• Compared with the high base in the previous year, KSH Holdings’ (KSH) results were below expectations for 3QFY17. This is largely an issue of timing as recognition of profits tends to be lumpy. 
• Results should catch up in 4QFY17.

Construction revenue drop is a timing issue. 

• For the construction segment, the revenue drop is largely a timing issue, because the NUS contract has yet to be recognised as actual work is expected to be carried out in FY18. 
• 3QFY17 was also a little slow as the Singapore residential market continued its woes, but there have been recent signs of stability. The outstanding orderbook of S$225m as at 31 Dec 16 together with an additional S$200m estimated term contract from NUS should provide visibility.

Cost management is taking place with operating profit margin improving. 

• Despite the slowing activities, we note that construction margin has improved from 21.5% to 23.1%, demonstrating the company’s ability to manage costs through enhanced productivity and technology adoption.

STOCK IMPACT

Share of associate to catch up from 4QFY17 onwards. 

• While we were expecting KSH’s partial disposal of its stake in Prudential Tower (17 strata titles) to come in 3QFY17, it appears that the contribution will only come in 4QFY17. This is one-third of KSH’s stake in Prudential Towers in terms of size (contributing S$4m-5m of profits) and we expect the remaining two-thirds to be sold at good profits in subsequent quarters.

Earnings and larger pre-sold property pool growth to be supported by Gaobeidian project. 

• During the quarter, more of its property inventory was sold with approximately 95.6% of launched units being sold (94.2% in previous quarter). Hence, it has a balance amount of shared revenue of approximately S$196.0m to be progressively recognised, underpinning the group’s shared profits for the next two years. 
• Sales for the Gaobeidian project have also commenced, supporting the pool of property development revenue.

EARNINGS REVISION/RISK

Forecasts unchanged as fundamentals intact. 

• We keep future forecasts unchanged as it is largely a matter of timing. Profits from associates will play catch-up in 4QFY17 as profits for the Prudential Tower sales come in. 
• While we feel there is some risk of slowdown in the Singapore property market, we also note that there is upside potential to the dividends.

VALUATION/RECOMMENDATION

Maintain BUY with P/B-based target price unchanged. 

• We maintain 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 5.6%.

SHARE PRICE CATALYST

Better-than-expected dividend payout. 

• As before, while we expect the company to pay at least S$0.03/share in dividend (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/ 2017-02-10

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.690 Same 0.690