KSH Holdings - UOB Kay Hian 2018-08-13: 1QFY19 Mixed Results

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KSH HOLDINGS LIMITED SGX:ER0

KSH Holdings (KSHH SP) - 1QFY19 Mixed Results

• KSH reported attributable net profit of S$6.0m, or 16.2% of our full-year estimate. Net profit declined 3.8% y-o-y as share of loss from associates and higher construction costs were only partially offset by a 31.3% y-o-y rise in revenue.
• While orderbook remains healthy, the outlook for Singapore residential property is challenging.
• We cut our target price to S$0.87 as we factor in the impact of cooling measures and tweaks in our Gaobeidian assumptions. Maintain BUY.

1QFY19 RESULTS

Mixed results for 1QFY19.

• KSH Holdings (KSH) threw up a mixed bag of results in 1QFY18. 
• Revenue rose 31.3% y-o-y as a surge in construction revenue (+33.2% y-o-y) more than offset lower rental income (-3.9% y-o-y). However, profit from operations before share of results from associates and JV declined 1.6% y-o-y, dragged down by higher construction costs (+45.8% y-o-y) which management attributed to an increase in construction works and provision for anticipated losses on an on-going project.

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Increased share of loss of associates helped by JV contribution.

• The share of results of associates registered a loss of S$3.1m (+22.7% y-o-y) due to higher expenses incurred on three property development projects prior to sales launch. However, share of results of JVs rose to S$2.5m (+38.5% y-o-y) due to progressive profit recognition from High Park Residences.

STOCK IMPACT

Cooling measures bite, KSH’s minority stakes still pose an impact.

• The abrupt introduction of property cooling measures will likely curtail investment demand for private residential while clipping supply of en-bloc redevelopments. 
• We expect buying in the private residential sector will be more selective due to weakened sentiment and a perceived elevation in bargaining power by home buyers. Projects that will enjoy good launches will likely have to be priced aggressively and the anticipated developers’ margin expansion riding on a bull market will not materialise. 
• While a moderation in supply going forward may alleviate developers’ pain, market fundamentals spell a need for developers to increase marketing efforts to move inventory.

Construction bottoming out but watch out for margins.

• The construction sector remained in contraction but at a slower 4.4% y-o-y in 2Q18. According to the Building and Construction Authority of Singapore (BCA), the sector is showing signs of bottoming out as y-o-y declines have moderated. 
• Total construction demand has increased, driven by private residential development and public civil engineering projects. However, the challenging property sector will have an impact on private residential construction costs due to developers’ desire to maintain margins in a challenging environment and the hike in Goods & Services Tax (GST).

Healthy orderbook to provide earnings visibility.

• KSH’s healthy orderbook of S$588m provides earnings stability and visibility going forward. We think the huge orderbook also allows KSH to be selective in project tenders to protect margins.

Sale of office units in Prudential Tower to bump up earnings.

• KSH’s 28%-owned associate divested seven strata office units in Prudential Tower in Jul 18. The disposal, subject to actual completion, is expected to contribute positively to KSH’s results in FY19.

EARNINGS REVISION/RISK

• We lower FY19-20 net profit forecasts and introduce FY21 estimate at S$36.6m (- 0.8%), S$78.6m (-20.3%) and S$72.5m respectively. We factor in the impact of the cooling measures on Singapore residential property, unfavourable renminbi movement against Singapore dollar and tweak our estimates of Gaobeidian’s roll-out schedule. 
• We have not incorporated the sale of office units in Prudential Towers, pending actual completion.
• Risks include:
  1. weaker-than-expected demand for private residential apartments,
  2. regulatory risks in relation to Gaobeidian development,
  3. margin pressure from the construction business, and
  4. a slowdown in construction orders due to lacklustre private demand.

VALUATION/RECOMMENDATION

• Maintain BUY with a lower SOTP-based target price of S$0.87, pegged to a higher RNAV discount of 50% (previously 40%). 
• A challenging residential market in Singapore is posing uncertainty on sell-through rates for KSH’s residential development projects while existing inventory remains.

SHARE PRICE CATALYST

• Success in Gaobeidian projects.
• Stronger-than-expected demand in Singapore property and construction markets.

Yeo Hai Wei UOB Kay Hian Research | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-13

SGX Stock Analyst Report BUY Maintain BUY 0.87 Down 1.040