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CHOO CHEE ONN, chairman and managing director of KSH Holdings, is excited about the Singapore government’s infrastructure spending plans, which include proposals to expand Changi Airport and build a new seaport at Tuas.
The construction company has benefited from a boom in property development in recent years, winning building contracts as well as taking stakes in some projects. As the slew of cooling measures begins to bite, however, Choo figures the time is right for KSH to refocus on infrastructure projects in the public sector. “While the projects are not open for tender yet, we will be looking at them when the time comes,” he says.
The way Choo sees it, KSH is well positioned to win tenders for public projects with the experience it has amassed over the years. “The government prioritises quality of work and safety reports. We believe we stand a good chance in the public sector, not just on pricing but also on our track record of quality and safety,” he says.
In its first win of the year, KSH clinched a S$59.5 million (RM154.53 million) contract from JTC Corp for the construction of a single-storey building on Ayer Rajah Avenue. Work started in April and is expected to be completed by January 2015.
The company recently completed other public sector projects, including the construction of primary schools at Punggol Site 18 on Punggol Place and at Sengkang Site 12A on Anchorvale Link for the Ministry of Education. It also completed the building of two blocks of 21-storey residential colleges with a two-storey podium, five blocks of two-storey common facility buildings and a four-storey education resource centre for NUS University Town.
Property development boom
For the moment, however, property development is still keeping KSH busy. Among its private property projects is the 84-unit Ardmore Three, a 36-storey condominium on Ardmore Park. The S$78.7 million contract is the first that KSH obtained from Wheelock Properties. The project is expected to receive its temporary occupation permit (TOP) in 2015.
TOP will also be issued in 2015 to Eight Courtyards, a 654-unit condo on Canberra Drive. The project comprises five 14-storey blocks and seven 15-storey blocks. Frasers Centrepoint and Far East Organisation, who are jointly developing the project, awarded the S$138.4 million construction contract to KSH in 2011. In January last year, the developers also awarded a S$110.28 million contract to KSH for the construction of Seastrand in Pasir Ris. The contract entails building two 12-storey blocks and seven 11-storey blocks with a total of 473 units. The development is expected to be completed in 2014.
This year, KSH was awarded a S$142.3 million contract by a consortium comprising Frasers Centrepoint, Far East Organisation and Sekisui House to construct Q Bay Residences on Tampines Avenue 10. The contract includes the construction of eight 16-storey blocks with a total of 630 units. The project is expected to obtain TOP in 2017. On Aug 27, KSH announced that it had won a S$98.94 million contract from Oxley Viva to construct NEWest, a mixed-use development on West Coast Drive. The new contract lifts KSH’s order book to S$478 million and is expected to contribute to the group’s financial results until 2016 financial year (FY16).
KSH has also taken up a 12.25% equity interest in Oxley Viva through its 35%-owned associated company, Unique Consortium, which has a 35% stake in Oxley Viva. In fact, through its investment in associates, KSH currently has interests in 13 property development projects with stakes varying from 12.25% to 45%. Six of these projects have been fully launched, with more than 80% of units sold. The two most recent launches, NEWest and KAP, have seen brisk sales since May. NEWest is about 76% sold, while only two retail units are unsold at KAP.
While these stakes have boosted profitability at KSH, Choo now fears that the property development boom could be ending. Notably, the government has introduced tighter rules for property loans to individuals. “The property market is feeling the impact of the recent cooling measures. We will be more cautious in doing property development projects. For private projects, you tend to go in with a lower bid, whereas government projects emphasise quality and safety before they look at the price,” Choo explains.
UOB Kay Hian analyst Loke Chunying forecasts residential property volumes will moderate 20% to 40% year-on-year. He also sees prices correcting 3% to 8% as property investment demand slows. Singapore’s housing sales fell to 482 units in July, the lowest level in almost four years, according to government data. But they rebounded strongly to 742 units in August, as developers marketed more projects. Monthly sales averaged 1,700 units in the first six months of the year.
Choo figures that KSH won’t be too badly hurt by the turn in the market. Its strategy has always been to enter into joint ventures with partners such as Heeton Holdings, Zap Piling and TEE International. “I think there’s a lot of benefits in joint ventures. We can tap our partners’ resources and expertise and share the risk. At the same time, we can do more projects,” says Choo. “Our core business is still in construction. If we were to develop properties on our own, the other developers will not give us the construction jobs as we are competing with them,” he says.
Choo reveals that KSH is again partnering Heeton to acquire another en-bloc site for joint development. The deal is estimated to be worth S$150 million and the site is located near the central region.
Overseas ventures
Besides refocusing on public sector infrastructure projects in Singapore, KSH is also looking overseas for growth. The company has entered into a joint venture with Heeton, TEE, Zap Piling and Beijing Jin Hua Tong Da Real Estate Development Co to develop Gaobeidian New Town. Beijing Jin Hua will hold a 55% stake in the project, while KSH, Heeton, TEE and Zap Piling will take up stakes of 22.5%, 9%, 9% and 4.5%, respectively.
With an estimated capital outlay of 16 billion yuan (RM8.53 billion), the massive 533.3ha development is located in the heart of the Great Beijing Economic Circle, 82km from Beijing. Situated next to the Beijing Shijiazhuang Expressway and the Beijing High Speed Rail passenger line, the project is expected to capitalise on Beijing’s property market for the next 10 to 15 years. “We are talking about building a whole new township like Toa Payoh,” says Choo. The Gaobeidian township will comprise mainly residential units, with about 20% allocated for commercial use as well as supporting infrastructure such as schools and hospitals.
In April, KSH’s 50% owned associate Sino-Singapore Kim Seng Heng (Beijing) Engineering Construction Co was awarded a contract worth 157 million yuan by Beijing Jin Hua for the construction of Liang Jing Ming Ju Phase 4. The project is a mixed-use development in Beijing comprising four condo blocks with office and commercial units.
KSH is also looking at opportunities in Jakarta. “We are exploring the possibility of breaking into the Jakarta market through a joint venture. Indonesia has a growing middle class and we believe that there is a demand for property there,” says Choo.
Legal tussle
Despite its track record, KSH recently found itself embroiled in a lawsuit over the construction of The Coast. Developed by Ho Bee Investment, The Coast is a 249-unit luxury condo at Sentosa Cove. KSH’s wholly owned subsidiary, Kim Seng Heng Engineering Construction (KSHEC), was the main contractor for the project, which was completed in May 2009. The Coast’s residents’ management committee is taking legal action against Ho Bee and its contractors for alleged defects, including flooded staircases and termite-infested pool decking.
In a statement filed with the Singapore Exchange on Sept 10, Choo highlights that KSHEC has filed a comprehensive defence in response to the suit and will take all necessary steps to defend its interests, including filing indemnity claims against the relevant subcontractors as third parties to the suit. “In the nature of the group’s business, legal claims similar to the suit are not unusual,” he says. According to the statement, the amount claimed in the suit against KSHEC is likely to be insignificant.
Analysts also believe the lawsuit by The Coast’s management committee will have a fairly limited impact on the company. “In our judgement, the group is unlikely to suffer significant reputational harm. While there may be some negative headlines ahead, these lawsuits are not uncommon and KSH has a long track record of quality in the sector,” says Eli Lee, investment analyst at OCBC Investment Research.
Strong earnings
For the first quarter (1Q) of FY14 ended June 30, KSH reported a 157% surge in earnings to S$11.5 million from S$4.5 million a year ago. This was achieved on the back of a 50.9% increase in group revenue to S$83.3 million and a jump in the share of results of associated companies to S$7.8 million in 1QFY14. Revenue from the construction segment increased 49.6% to S$71.7 million in 1Q from S$47.9 million a year ago, contributing 86.1% to group revenue. Sales from the property development segment and rental income contributed 12.1% and 1.8%, respectively to group revenue.
Can KSH maintain this level of revenue and earnings? Is its stock attractive? “Despite the cautious outlook for the local property sector, we remain upbeat on KSH as most of its property sales have already been locked in. The remaining five projects that have yet to be launched are of a smaller scale, reducing the group’s exposure to the local property market,” says Loke of UOB Kay Hian. Assuming at least 80% sales for all of its local projects, Loke estimates KSH to recognise a profit of S$175.6 million from its property development arm over the next five financial years from FY14 to FY19.
Much could eventually depend on KSH’s success in winning the public sector contracts that Choo is eyeing. For now, however, the risks seem low for investors. KSH has a market value of S$201 million and is trading at 4.4 times current earnings. “KSH’s balance sheet remains strong, with net debt-to-asset ratio remaining low at 1.3%. Its dividend payout ability continues to be underpinned by strong free cash flow generation of two cents per share in 1QFY14,” notes Loke.
UOB Kay Hian has a “buy” call on the stock, with a target price of 71 cents. OCBC is a shade more optimistic, with a target price of 73 cents. — The Edge Singapore
This article first appeared in The Edge Financial Daily, on October 1, 2013.
