KSL's maiden venture outside Johor to support growth

KSL Holdings Bhd (June 5, RM1.36)
Maintain buy with fair value RM2.12: We remain positive on KSL's prospects. The group's medium- to long-term growth will be supported by its planned Bandar Bestari township project in Klang, Selangor, the group's maiden venture outside its base in Johor.

The planned gross development value (GDV) of Bandar Bestari is approximately RM3 billion, which will keep management busy for the next eight to 10 years.

After several delays, due in part to the time taken to treat the soft soil at the site, KSL has finally unveiled to the public the first phase of Bandar Bestari, the Canary Garden, comprising cluster linked houses and semidees.

It organised a preview in mid-May where we understand 150 units were released and approximately 60% have been booked so far.

The indicative price for a cluster link house is RM788,000 while the semidees are priced in excess of RM1 million per unit.

In total, the first phase will have more than 380 houses. Based on our checks, the group is now offering free legal fees, developer interest bearing scheme (DIBS) and free maintenance fees for first two years in order to increase the attractiveness of the project.

We view the 60% booking as an encouraging development, given the current challenges in the property sector following the tightening of lending by banks and the introduction of responsible lending guidelines by Bank Negara Malaysia.

We believe the buyers are attracted to the concept of Bandar Bestari, which offers a lot of greenery and beautiful landscaping, as well as a commercial hub and a mall in the future.

Back on its home turf, KSL had the soft opening of its maiden hotel, KSL Resort, in April. The five-star hotel, which is integrated to the KSL City Mall, is the largest in Johor with 868 rooms. We believe the hotel would provide another stream of recurring income upon reaching the optimal occupancy rate, perhaps in the next 12 to 18 months.

As it is, the KSL City Mall and its other hypermarkets are providing a stable annual rental income of RM46 million.

We maintain our "buy" recommendation on KSL with an unchanged fair value of RM2.12, derived from applying an unchanged 50% discount to our revalued net asset value (RNAV).

We continue to like KSL for its; (i) prospective double digit earnings growth; (ii) earnings sustainability over the medium to long term; (iii) established recurring income stream; and (iv) experienced and hands-on management team.

Prospective valuation, at 5.3 times FY12 price earnings ratio (PER) and 0.5 times price-to-book value (P/BV), is undemanding too, in our opinion.

Unfortunately, KSL's share price has not been performing YTD. It reached a high of RM1.59 in February 2012 before retracing 13.2% to the current level. We attribute the decline to the absence of catalysts to excite the market.

It did not declare a dividend for FY11 (as the group conserved cash for the needs of its Bandar Bestari and other projects), while delays in the launch of Bandar Bestari may have kept prospective investors on the sidelines.

However, we anticipate things will look up from here on, underpinned by the group's readiness to launch Bandar Bestari and the encouraging response to its preview.

We expect earnings from the Bandar Bestari project to start trickling in from 4QFY12 with material contribution from FY13 onwards. — ZJ Research, June 5

This story appeared in The Edge Financial Daily on June 6, 2012.