3 June 2011 KSH Holdings Ltd HOLD - listed...
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Please refer to the important disclosures at the back of this document. KSH Holdings Ltd 3 June 2011 Initiating Coverage HOLD Current Price: S$0.25 Fair Value: S$0.31 SINGAPORE Company Report MITA No. 022/06/2011 Reuters Code KSHH.SI ISIN Code ERO Bloomberg Code KSHH SP Issued Capital (m) 343 Mkt Cap (S$m / US$m) 86.4 /70.1 Major Shareholders Choo Chee Onn 20.35% Kee Seng Lim 15.64% Ngat Khow Kwok 15.64% Cheng Hoe Tok 15.64% Free Float (%) 32.4% Daily Vol 3-mth (‘000) 688 52 Wk Range 0.215 - 0.285 Value to emerge but short term headwinds prevail Construction is core, recent expansion into property development. Listed on SGX in 2007, KSH Holdings is a company involved in construction, property development and management. Its core construction segment is focused in Singapore, where KSH acts as the main contractor for projects in both the private and public sectors. As of 31 Mar 2011, its pipeline consisted of seven projects worth S$406m that would underpin revenues to 2013 with S$146m already recognized. In recent years, KSH also diversified into property development and management in Singapore and China. KSH typically works with JV partners to leverage off its partners' expertise and to manage its capital risk. Its current development portfolio consisted of six projects in Singapore and one in China. Value kicker in development business. There are three main components of KSH's value. First, its investment property in Tianjing - Tianxing Riverfront Square. Secondly, its property development business. Finally, its construction business. We use a sum of parts methodology to determine KSH's value. Assuming 80% occupancy and a 7% cap rate, we value KSH's stake in Tianxing Riverfront at S$48m. For the development segment, we add a S$53m NPV surplus to assets on book. Finally, we value the construction segment at 3 times FY11 earnings. We then apply a 60% discount for liquidity and development segment specific risks and arrive at a 31 cents share price value. Market overly punishing share price. From KSH's price history, we observe price movements (against the STI) in excess of 3 standard deviations on dates when sequentially higher earnings were announced. This is despite the significant forward visibility in KSH's construction order book. In addition, the share price did not react to several notable land acquisitions, particularly Farrer Park site from which an estimated NPV of S$43m may be derived. In our view, these data-points imply a lack of market attention or an overly-punishing discount to its development business. HOLD due to flagging drivers. Over the longer term, we believe the price would reflect the value of its development segment as earnings get manifested into hard cash in the balance sheet. In the next 12 months, however, we see headwinds from a slow-down in private construction demand and uncertainty in the private residential sector. When these clouds clear and more clarity is available for project sales, especially for Cityscape@Farrer Park, we could see a significant re-rating of the share price. We initiate coverage on KSH with a HOLD rating and a fair value estimate of 31 cents. Eli Lee (65) 6531 9112 e-mail: [email protected] 1000 1500 2000 2500 3000 3500 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 0.00 0.05 0.10 0.15 0.20 0.25 0.30 KSH Hldgs STI (S$m) FY10 FY11 FY12F FY13F Revenue 290.9 262.8 223.9 213.0 Shareholders' profit 20.0 21.6 18.7 23.7 NAV per share (S-cents) 40.7 43.9 45.6 50.6 P/NAV (x) 0.6 0.6 0.5 0.5 PER (x) 3.9 3.8 4.6 3.6
Transcript of 3 June 2011 KSH Holdings Ltd HOLD - listed...
Please refer to the important disclosures at the back of this document.
KSH Holdings Ltd
SINGAPORE Company Update Results MITA No. 010/06/2009
3 June 2011
Initiating Coverage
HOLDCurrent Price: S$0.25Fair Value: S$0.31
SINGAPORE Company Report MITA No. 022/06/2011
Reuters Code KSHH.SI
ISIN Code ERO
Bloomberg Code KSHH SP
Issued Capital (m) 343
Mkt Cap (S$m / US$m) 86.4 /70.1
Major Shareholders
Choo Chee Onn 20.35%
Kee Seng Lim 15.64%
Ngat Khow Kwok 15.64%
Cheng Hoe Tok 15.64%
Free Float (%) 32.4%
Daily Vol 3-mth (‘000) 688
52 Wk Range 0.215 - 0.285
Value to emerge but short term headwinds prevail
Construction is core, recent expansion into propertydevelopment. Listed on SGX in 2007, KSH Holdings is acompany involved in construction, property development andmanagement. Its core construction segment is focused inSingapore, where KSH acts as the main contractor for projectsin both the private and public sectors. As of 31 Mar 2011, itspipeline consisted of seven projects worth S$406m that wouldunderpin revenues to 2013 with S$146m already recognized.In recent years, KSH also diversified into property developmentand management in Singapore and China. KSH typically workswith JV partners to leverage off its partners' expertise and tomanage its capital risk. Its current development portfolioconsisted of six projects in Singapore and one in China.
Value kicker in development business. There are threemain components of KSH's value. First, its investment propertyin Tianjing - Tianxing Riverfront Square. Secondly, its propertydevelopment business. Finally, its construction business. Weuse a sum of parts methodology to determine KSH's value.Assuming 80% occupancy and a 7% cap rate, we value KSH'sstake in Tianxing Riverfront at S$48m. For the developmentsegment, we add a S$53m NPV surplus to assets on book.Finally, we value the construction segment at 3 times FY11earnings. We then apply a 60% discount for liquidity anddevelopment segment specific risks and arrive at a 31 centsshare price value.
Market overly punishing share price. From KSH's pricehistory, we observe price movements (against the STI) in excessof 3 standard deviations on dates when sequentially higherearnings were announced. This is despite the significant forwardvisibility in KSH's construction order book. In addition, theshare price did not react to several notable land acquisitions,particularly Farrer Park site from which an estimated NPV ofS$43m may be derived. In our view, these data-points imply alack of market attention or an overly-punishing discount to itsdevelopment business.
HOLD due to flagging drivers. Over the longer term, webelieve the price would reflect the value of its developmentsegment as earnings get manifested into hard cash in thebalance sheet. In the next 12 months, however, we seeheadwinds from a slow-down in private construction demandand uncertainty in the private residential sector. When theseclouds clear and more clarity is available for project sales,especially for Cityscape@Farrer Park, we could see asignificant re-rating of the share price. We initiate coverageon KSH with a HOLD rating and a fair value estimate of 31cents.
Eli Lee(65) 6531 9112e-mail: [email protected]
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KSH Hldgs
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(S$m) FY10 FY11 FY12F FY13FRevenue 290.9 262.8 223.9 213.0Shareholders' profit 20.0 21.6 18.7 23.7NAV per share (S-cents) 40.7 43.9 45.6 50.6P/NAV (x) 0.6 0.6 0.5 0.5PER (x) 3.9 3.8 4.6 3.6
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Table of Contents
Page
Section A Business Overview 3Construction Segment 4Property and Management Segment 5Corporate Structure 7
Section B Business Strategy and Analysis 8Construction Segment 8Property and Management Segment 11Gaobeidian Project 11SWOT Analysis 13
Section C Macro Drivers and Outlook 14Construction Outlook 14Residential Market Outlook 17
Section D Valuation 20SOTP Valuation 20Investment Thesis 21Risks 23
Section E Disclaimer 25
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Section A: Business Overview
Founded in 1979, KSH Holdings is a company involved in construction,property development and management. It was listed on the SGX in 2007.
KSH has two business segments: 1) construction and 2) propertydevelopment and development. The main construction segment is focusedin Singapore, where KSH acts as the main contractor for awarded projectsin both the private and public sectors. In recent years, KSH also diversifiedinto property development and management in Singapore and China.
Exhibit 3: Revenue down after boom years of FY09-10
Source: Company, OIR
257,307285,394
324,019
5,482
4,499
4,745
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
FY09
FY10
FY11
Constr Prop. Dev
Revenue (S$000)
Exhibit 1: FY11 revenue dominated by property development segment
Source: Company, OIR
Prop. Dev2%
Constr98%
Exhibit 2: FY11 profit before tax breakdown by business segment
Source: Company, OIR
Constr89%
Prop. Dev11%
Exhibit 4: EBITDA margin (%) by business segment
Source: Company, OIR
-3%
-1%
1%
3%
5%
7%
9%
11%
13%
15%
FY09
FY10
FY11
-30%
-10%
10%
30%
50%
70%
90%
110%
130%
150%
Constr (LHS) Prop. Dev (RHS)
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Construction Segment
In Singapore, KSH is registered with the Building and Construction Authority(BCA) with an A1 grading under the category CW01 for general building,which allows it to tender for public sector construction projects of unlimitedvalue. Under the BCA's CW02 category for civil engineering, KSH isregistered with an A2 grading which allows public sector projects of up toS$85m. Since 1982, KSH has taken on private and public constructionprojects with a total value in excess of S$2.5bn. Of note is that KSH enjoysan established relationship with several developers such as Ho Bee andLippo Group. As of 31 Mar 2011, its pipeline consisted of seven projectsworth S$406m that would underpin revenues to 2013 with S$146m alreadyrecognized.
Exhibit 5: Net assets by business segments
Source: Company, OIR
Prop. Dev, $66m, 51%
Constr, $65m, 49%
Others: $78mElimination: -$43mTotal: $144m
Exhibit 6: Total assets by geography
Source: Company, OIR
Singapore , $276m,
74%
Malaysia, $1m, 0%
PRC, $99m, 26%
Elimination: -$16mTotal: $360m
Exhibit 7: Order book of construction projects as of Mar 11Client Value
(S$m)Secured Start Completi
onLength
(Months)NUS – Cinnamon and Tembusu NUS 83.4 Jun-09 Jun-09 Apr-11 22Watten Residences Simefield 36 Nov-09 Nov-09 Dec-11 25Education Resource Centre NUS 40.3 Dec-09 Dec-09 Jun-11 18Madison Residences Keppel Land Realty 48.3 Jun-08 Dec-09 Mar-12 27Centennial Suites Lippo Real Estate 70.6 Jun-10 Jul-10 May-13 34Two schools at Punggol and Sengkang MOE 49.1 Mar-11 Mar-11 Jul-12 16Ardmore Three Wheelock 78.7 May-11 May-11 Aug-13 27
Total 406.4Recognized 145.9Remaining 260.5
Source: Company, OIR
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Property Development and Management Segment
In recent years, KSH has diversified into property development which yieldsnatural synergies with its core construction skill-set. Note that KSH typicallyworks with joint venture partners in its projects in Singapore and China toleverage off its partners' expertise and to manage its capital risk. Its currentlandbank in Singapore consists of the following projects listed below.
In China, KSH is currently awaiting approval for the Phase 4 launch of amid-range condominium project in Beijing, Liang Jing Ming Ju, in which ithas a 26.24% stake. This project is situated east of the fifth ring road inBeijing and is about 10 miles away from the city centre. Phase 4 has anestimated net sellable area of 40,000 sqm.
Exhibit 8: List of Singapore development projectsName Location Stake Tenure Land
size (sq ft)
Plot Ratio
Units Land Price ($m)
Constr. Cost
(S$ psf )
Break-even ASP
(S$ psf )
Forecast ASP
(S$ psf)
Project Profit
(S$m)
Launched Start of Constr
TOP NPV ($m) (effective
stake)
The Boutiq 145 Killiney Road 35.0% Freehold 39,972 2.8 130 121 350 1,792 2,200 41 Apr 11 Jun 11 Dec 14 13
Lincoln Suites Khiang Guan Avenue
25.0% Freehold 59,986 3.0 175 243 325 2,094 2,000 -15 Oct 09 Sep 10 Dec 14 -3
Cityscape@Farrer Park
Mergui Road 35.0% Freehold 90,855 3.3 250 120 325 858 1,350 147 Oct 10 Feb 11 Dec 15 43
MacPherson Green site
MacPherson Road, District 13
25.0% Freehold 66,932 2.1 200 105 250 1,255 NA NA NA
Camay Court Lorong M, Telok Kurau Road
32.0% Freehold 31,930 1.4 70 31 250 1,120 NA NA NA
Geylang 5 Lorong 26, Geylang
45.0% Freehold 26,625 2.8 80 28 250 767 NA NA NA
Source: Company, OIR
Notes: WACC is taken to be 7.07%, efficiency generally taken to be between 90-95%.
These numbers are estimates by OIR used in our model for valuation.
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Exhibit 9: Location of Liang Jing Ming Ju
Source: Google Maps, OIR
Central Beijing
Liang Jing Ming Ju
20 km
KSH also recently teamed up with Heeton Holdings and Tee Internationalto form a 60:20:20 consortium, KSH (China) Venture Pte. Ltd, which wouldin turn take up a 51% stake in a JV to develop Phase 1 of a proposed"Gaobeidian New Town Shangdong New Area" in Gaobeidian City (GBD), amostly rural city about 100 km south-west of Beijing. Corresponding to its60% stake, KSH has injected S$15m in capital into KSH (China) Venture.Phase 1 of the proposed GBD New Town is expected to be a condominiumproject.
In addition, KSH owns a 69% stake in a rental property in Tianjing, TianxingRiverfront Square which is a 36 level mixed commercial retail developmentwith a net leasable area of 41,834 sqm. The average rental is RMB 64 persqm per month.
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Corporate Structure
100% KSH Property Development
100% KSH Investment Property
100% KSH Property Management
100% KSH Realty 100% Ferris Rise
100% Property Premier
100% KSH Engineering Construction
100% KSH Overseas
60% KSH (China) Venture
100% Technopath Construction
69% TTX Real Estate Development
35% Mergui Dev. 50% Sino-Singapore KSH (Beijing) Eng. Constr
58.3% Duford Investment (Hong Kong)
25% Phileap 45% Beijing Tong Hua Da Real Estate Development
35% Unique Dev
45% Development 26
25% Unique Realty
32% Residenza
Source: Company
KSH Holdings
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Section (B): Business Strategy and Analysis
Construction Segment
Construction segment background. KSH has a strong construction trackrecord having completed more than 98 public and private projects worth inexcess of S$2bn since 1982. It has its own in-house structural steelworksand fleet of cranes which enhances its capabilities to work on a wide rangeof construction projects, including those in the residential, industrial,commercial and civil engineering segments. KSH's clients includegovernment entities and private institutions ranging from residentialdevelopers, industrial manufacturers to school boards.
Stronger niche in private sector construction. We found that 79 out of105 contracts awarded after 1982 were private sector contracts. In termsof dollar value, 68% of contracts awarded were from the private sector.
Using earliest BCA data from 1995, we see that the breakdown betweenpublic and private contracts in Singapore over 1995-2010, in terms of totaldollar value, was roughly even at 47% to 53% breakdown. KSH's breakdownbetween public and private contracts over that period was 33% to 67% -leaning strongly towards private contracts.
Exhibit 10: Contract wins by year
Source: Company, OIR
0
50
100
150
200
250
300
350
400
450
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Private Contracts Public Contracts
S$m
KSH's track record of private contract awards has a 0.25 correlation withannual total domestic private contracts value. The correlation for KSH'spublic contracts awards is -0.03.
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Exhibit 11: 0.25 correlation between KSH private contract wins and total private contracts awarded in domestic market
Source: BCA, OIR
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
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2006
2007
2008
2009
2010
0
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100
150
200
250
300
350
400
450
BCA KSH private wins
S$m S$m
Exhibit 12: -0.03 correlation between KSH private contract wins and total private contracts awarded in domestic market
Source: BCA, OIR
0
5000
10000
15000
20000
25000
1995
1996
1997
1998
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2000
2001
2002
2003
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2005
2006
2007
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2009
2010
0
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100
150
200
250
300
BCA KSH public wins
S$mS$m
We believe these results indicate that KSH has a stronger niche in privateconstruction projects, as opposed to public ones. We think this is a functionof KSH seeking healthier profit margins in private sector projects and itsrelationships with several key clients. Two clients in particular (Ho Bee - 11projects valued at S$354m and the Lippo Group - 2 projects valued atS$194m) have accounted for 21% of all contracts win by dollar value since1982. Hence a weak construction demand outlook in the private sectormay affect KSH's earnings through lower margins and less contracts wins.
This may be especially so if KSH moves significantly into tendering forHDB contracts over the next two years as demand picks up in that spaceversus slowing construction demand in the private sector.
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Exhibit 13: Market share of private contracts peaked in 2007
Source: BCA, OIR
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
market share BCA total
S$m% Market Share of Private Contracts
Construction market increasingly competitive. We examine theevolution of KSH's market shares in the domestic private construction sectorover 1995 to 2010. From 1995 to 2007, we see KSH steadily gaining marketshare to a 7% level. In 2008, KSH was unable to expand fast enough tokeep up with the whooping 268% expansion of the private contracting marketand its share fell to 2.7%. As the market size began falling back to 2007levels in 2010, KSH did not regain its original dominant share. We believeforeign contractors, who came to Singapore during the 2007-2009construction boom, made conditions more competitive. This is likely tocontinue going forward.
Exhibit 14: Market share of public contracts ~1% and inconsistent
Source: BCA, OIR
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.04
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1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
5000
10000
15000
20000
25000
market share BCA total
S$m% Market Share of Public Contracts
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Property Development and Management Segment
Property development strategy. In Singapore, KSH frequently workswith JV partners, such as Tee International and Heeton Holdings, to developresidential projects. Through this set-up, KSH can leverage off its coreconstruction skill-set alongside its partners expertise and also managecapital risk. KSH's development projects are typically financed with 80%debt.
So far, KSH has been fairly successful in its development ventures andhas sold 116 out of its 175-unit Lincoln Suites project in Khiang Guan Avesince starting sales in Oct 2009. Two other projects, the Boutiq at 145Killiney Rd and Cityscape@Farrer Park, have also been launched for saleswhile the domestic pipeline consists of three more sites. However, KSHmay find it challenging to compete against larger developers with moreestablished track records, especially when the private residential marketweakens.
In China, KSH has a working relationship with the Chinese developer, BeijingJia Hua Hong Yuan Investment Co.(BJHHY), with which it developed a mid-tier condominium project Liang Jing Ming Ju in Beijing.
GaoBeiDian Project
A key management personnel of BJHHY, Mr. Zhao Wen Quan, is reportedlya native of Gaobeidian city (GBD) and has strong ties with the local GBDgovernment. GBD is a mostly rural city about 100 km south-west of Beijingwhere a high-speed train station is expected to be built on the Beijing -Shijiazhuang line, cutting the travel line between GBD and Beijing to lessthan 30 minutes for an estimated fare of RMB30-50 one way. This high-speed rail project is slated to be completed in 2012.
The GDB authorities is looking to work with BJHHY and Singaporeandevelopers to expand and redevelop GBD city with a proposed "GaobeidianNew Town Shangdong New Area" covering 5 million square meters to thenorth-east of the current city center. The total development cost is estimatedat RMB 16 billion.
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Exhibit 15: Location of Gao Bei Dian
Source: Google Maps, OIR
Gao Bei Dian
~100 km
To that end, KSH recently teamed up with Heeton Holdings and TeeInternational to form a 60:20:20 consortium, KSH (China) Venture Pte. Ltd,which in turn holds a 51% stake in a joint venture company, Hebei ShangdongZhiye Co (HSZ), with BJHHY. Corresponding to its 60% stake, KSH hasinjected S$15m in capital into KSH (China) Venture. The joint venturecompany HSZ will develop Phase 1 of the development which is expectedto be a condominium project. Negotiations are underway regarding therelocating of the villagers on the land, and the land cost is understood to bestill uncertain. We note there are currently a healthy number of condominiumdevelopments along the main north-south artery near the city center andprice levels are around RMB4,000 per sqm. Management does not expectto inject any more cash into Phase 1 beyond the S$15m already invested.
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SWOT AnalysisStrengths Weaknesses* Strong track record in construction industry * May take substantial time to ramp up expertise
in property development* Good relationship with key clients as such Ho Bee and Lippo Group
* Access to capital may be limited for meaningful expansion into property development
* Leverages off JV partners' expertise in development projects in Singapore and China
Opportunities Threats* Expansion into property development would be a lucrative source of future earnings
* May be exposed to margin pressure from commodity inflation* May face headwinds from weakening private sector construction demand* Development projects sales may slow from uncertainty in residential market
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Section C: Macro Drivers and Outlook
Construction Outlook
The construction outlook drives KSH’s core construction segment. Latesteconomic data from the Ministry of Trade and Industry (MTI) showed GDPgrowth in 1Q11 to be 8.3% YoY. GDP growth for Singapore in 2011 isforecast to be between 5% to 7% - a slowdown after the robust 14.5%expansion in 2010. The construction sector grew by a steady 6.1% in2010 after expanding at a blistering pace of 20.1% and 17.1% in 2008 and2009, respectively. By 4Q10, however, the sector had begun to contract (-2.0%). This trend was reversed when we saw the sector grew by 2.4% in1Q11. Looking forward, we expect the government's public projects, suchas MRT and expressway projects, to drive the construction sector. Privatesector projects may continue to slow given the uncertain private residentialmarket facing policy risks and a likely uptrend in interest rates.
Exhibit 16: GDP Construction segment growth
Source: MTI, OIR
-4
-2
0
2
4
6
8
10
12
14
4Q09
1Q10
2Q10
3Q10
Private Contracts
% YoY
This picture is mostly in line with the BCA forecast which predicts a drop inprivate construction contracts from to S$10-13bn this year from S$17.6bnin 2010 mostly due to a fall in private residential projects. This will benegated by an increase in public contracts value from S$8.3bn to S$12-15bn this year, bringing the total forecast for 2011 to S$22-$28bn - mostlyflat compared to S$25.7bn in 2010.
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Over the last few months, inflationary pressure on construction materialscontinued to bear on margins amidst an overall environment of rising Chinesedemand and supply disruptions. We note that commodity prices havebecome increasingly volatile over the last couple of weeks due to fears of aChinese slowdown but expect the overall uptrend of material prices tocontinue to be challenging for the domestic construction sector. In addition,the increase in Foreign Worker Levy is estimated to add a 1-2% downsideto margins as this appears to have been mostly absorbed by contractorsgiven still competitive tender price levels for general contracting work.
Exhibit 17: BCA construction forecast
Source: BCA
Notes: Excludes reclaimation contracts
# based on forecast as on 12 Jan 2011
Exhibit 18: Commodity inflationary pressures may persist
Source: BCA, OIR
0
20
40
60
80
100
120
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
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Feb-11
Concreting sand granite (20mm)cement ready mixed concrete
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Given the combined headwinds of falling private contracting demand,increased competitive pressures and inflationary forces on constructionmaterials, we believe that the outlook for KSH's construction segment ismuted. That said, it is likely that KSH would likely perform better than itspeers with its long track record, infrastructure set-up and relationship withmajor clients.
With the HDB expected to put out 25,000 BTO flats in FY11 versus 22,000originally planned, we think KSH is likely turn its attention to tendering forHDB contracts as tightness in that space emerges with increased demand.There is, however, still little clarity whether margins for such projects wouldbe as attractive as KSH's past projects.
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Residential Market Outlook
The private residential market drives KSH’s property developmentsegment.The Urban Redevelopment Authority's (URA) 1Q11 figures showeda 2.2% QoQ increase in the overall private residential price index. This isthe sixth consecutive quarter of moderating increases since 4Q09 - afterthe first of recent government cooling measures began on 14 Sep 09. Thenon-landed price index increase was even more mild at 1.6% QoQ.
Exhibit 19: 1,747 non-landed units sold in April (up 30% MoM)
Source: URA, Company
0
300
600
900
1,200
1,500
1,800
2,100
2,400
2,700
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
2,100
2,400
2,700
3,000
3,300
3,600
3,900
4,200
4,500
4,800
Units launched (LHS) Units sold (LHS) Unsold inventories (RHS)
In April, 1,788 private residential units (ex. EC) were sold, of which 1,747were non-landed units, up 30% MoM. The number of non-landed unitslaunched increased markedly to 2,020 units from 1,225 in March. As aresult, overall take-up rate fell to 87% and unsold inventory increased to4,718 units from 4,440 sold in Mar 11.
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Primary sales prices slowing significantly. Over 1Q11, we observe thatthe price appreciation in the uncompleted non-landed residential index(primary sales) slowed significantly to 1.0% in 1Q11 compared to 1.8% in4Q10. The index for completed property (secondary sales), however, heldsteady at 2.2%. In our view, this indicates buyer are now more willing topurchase completed units, as opposed to newly launched units fromdevelopers, since buyers can benefit from the current low interest rateenvironment by renting their units out immediately.
The theme of mass-market bullishness, however, pervades both primaryand secondary sales; the index for completed OCR properties acceleratedto 3.3% in 1Q11 compared to 1.1% in 4Q10. For uncompleted properties,the OCR segment showed steady appreciation whereas the CCR andRCR segment showed marked slowdown in 1Q11.
Exhibit 20: Uncompleted price index slowed to 1.0% in 1Q11
Source: URA, Company
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
Uncompleted QoQ (LHS) Completed QoQ (LHS)
% Change
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Further cooling measures possible. We believe recent data points showmass-market price momentum continues unabated and may test thegovernment's threshold of what is "stable and sustainable." Given theincreased likelihood of further cooling measures and expected residentialheadwinds from rising interest rates and physical completion, we thinksales at KSH's current projects may slow down.
Exhibit 21: In 1Q11, prices accelerated across all segments for completed properties
Source: URA, Company
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
Com NL CCR QoQ (LHS) Com NL RCR QoQ (LHS) Com NL OCR QoQ (LHS)
% Change
Exhibit 22: For uncompleted properties in 1Q11, prices deccelerated for CCR and RCR but OCR momentum remained steady
Source: URA, Company
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
Unc NL CCR QoQ (LHS) Unc NL RCR QoQ (LHS) Unc NL OCR QoQ
% Change
Page 20 3 June 2011
KSH Holdings Ltd
Section D: Valuation
In our view, KSH's value is driven from three main parts. First, its investmentproperty in Tianjing - Tianxing Riverfront Square. Secondly, its propertydevelopment business. Finally, its construction business.
Assuming 80% occupancy and a 7% cap rate, we value KSH's 69% stakein Tianxing Riverfront at S$48m.
For KSH's property development segment, we use the RNAV method tovalue its stakes in the six Singaporean projects. The book value of theseprojects is currently S$113m based on cost. We add a $53m surplus forthe net present value of expected profits from three launched projects, TheBoutiq, Lincoln Suites and Cityscape@Farrer Park.
For the construction segment, we value it at 3 times construction earningsfor FY12E. We feel this is a reasonable multiple based on the headwindsfacing this business segment.
After accounting for cash and debt, we arrive at a combined value of S$273musing a sum of the parts methodology. We apply a 60% discount to thisvalue for two reasons. First, the shares are fairly illiquid at a historical dailyaverage of ~500K and subjected to percentage price volatility and large bid-ask spreads due to the low price per share at 25 cents.
Secondly, 61% of our valuation is derived from the property developmentsegment. Because KSH is relatively new to the development business andmost of its projects are still unsold, we think a large discount is reasonableat this juncture. That said, we think strong sales and a proven ability toexecute on projects in future could be a potential catalyst for re-rating.
Exhibit 23: Peer comparisons (figures based on latest financial year)KSH Koh Brothers Lum Chang Lian Beng
Share price ($) 0.250 0.210 0.285 0.355Market cap ($m) 86 100 110 188
Revenues ($m) 268 364 198 345.7Net Income ($m) 21.6 12 25 24Net Margins ($m) 8.1% 3.3% 12.6% 6.9%
PE 4.0 8.4 4.4 7.8P/BV 0.7 0.6 0.8 1.3Sources: Bloomberg, OIRNote: We value KSH based on 3 times its construction segment earnings to factor in a weaker private sector construction environment going ahead
Page 21 3 June 2011
KSH Holdings Ltd
Investment Thesis. Our investment thesis is supplemented by ourobservation that KSH appears to suffer from a lack of market attention.From an analysis of KSH's daily price movement versus the STI, we sawprice movements in excess of 3 standard deviations on dates when verypositive earnings were announced. This shows the market can be surprisedby earnings despite the significant forward visibility in KSH's constructionorder book.
Exhibit 24: Sum of the parts - KSH's valuationS$m
Tianxing (80% occ, RMB 63/sqm rental, 8% cap rate) 48.0
Lincoln (On book) 57.8Development property (On book) 55.5NPV Surplus from Boutiq, Lincoln and Cityscape 52.7
Construction segment (5X FY13 Earnings) 60
plus cash 91.5minus debt -92.5
Total 273
Discount 60%After discount 109.1
Diluted Shares outstanding 352
Target price ($) 0.31Source: OIR
Exhibit 25: Event study of KSH share price
Note: Information in boxes denote date, event and KSH daily return (%) against the STI
Sources: Bloomberg, SGX, OIR
Note: Standard deviations measures were recalibrated after 2010 to account for an environment of significantly reduced volatility
0
20
40
60
80
100
120
140
160
180
200
Feb
07
May
07
Aug
07
Nov
07
Feb
08
May
08
Aug
08
Nov
08
Feb
09
May
09
Aug
09
Nov
09
Feb
10
May
10
Aug
10
Nov
10
Feb
11
May
11
FSSTI
KSH
11/12/08: Proposed warrant Issue (22.7%)
11/11/08: Announced 1H09 financial results (22.4%)
30/12/08: Followup details to warrant issues (16.4%)
22/3/11: Chinese Venture with Tee and Heeton announced (3.8%)
2/11/10: Announced 3Q10 results (3.5%)
Note significantly reduced volatility after 2010
Page 22 3 June 2011
KSH Holdings Ltd
In addition, we notice the price did not react to several land acquisitions.This is especially notable for the acquisition of the Farrer Park site fromwhich an estimated NPV of S$43m, on an effective stake basis, may bederived. Again, we think there is a lack of market attention or an overly-punishing discount is applied to its development business.
Initiate with HOLD rating; fair value estimate of 31 cents. KSH'sproperty development earnings would start to roll into earnings this year.Over the longer term, we believe the share price would reflect the value ofits development segment more fully when earnings started to be manifestedas hard cash in the balance sheet. In the next twelve months however, wesee headwinds from a slow-down in private construction demand anduncertainty in the private residential sector. When these clouds clear andmore clarity can be seen for project sales, especially for Cityscape@FarrerPark, we could see a significant re-rating of the share price.
Therefore, our fair value estimate for KSH is 31 cents with a 24% upsidefrom its current price. In addition, KSH is paying out a 2 cents dividendannually which would likely act as a support against any price downsidefrom its current 25 cent price. We initiate coverage on KSH with a HOLDrating.
Page 23 3 June 2011
KSH Holdings Ltd
Risks to Valuation
Downside risks to our valuation include:
1. Poorer than expected sales prices and volume at KSH's developmentprojects
2. Lower than expected number of contract wins
3. Profit margins of construction contracts overly impacted by excessivecompetition and cost of construction materials
4. Decreasing liquidity of share price due to a reduced float
5. Dilution from a private or public placement of shares at an unfavorableprice
Upside risks to our valuation include:
1. Better than expected sales prices and volume at KSH's developmentprojects
2. Construction demand in the market is higher than expected, leading tomargin expansion
3. Management divests the non-core Tianxing Riverside Square asset for asignificant gain over book
Page 24 3 June 2011
KSH Holdings Ltd
KSH Holdings' Key Financial Data
EARNINGS FORECAST BALANCE SHEETYear Ended 31 Dec (S$m) FY10 FY11 FY12F FY13F As at 31 Dec (S$m) FY10 FY11 FY12F FY13F
Revenue 290.9 262.8 223.9 213.0 Cash and cash deposits 83.3 76.5 69.6 71.0Other income 3.2 6.0 0.0 0.0 Developmental Prop 58.8 57.8 57.8 57.8Cost of construction -252.1 -221.0 -190.3 -181.0 Others 52.3 57.0 52.3 52.3Personnel expenses -7.9 -8.6 -3.1 -3.0 Current assets 194.3 191.4 183.8 184.0Depreciation of PPE -1.8 -1.8 -2.7 -2.9 Non current assets 162.4 168.3 173.5 186.3Finance costs -3.2 -2.2 -2.1 -2.0 Current liabilities 150.0 144.5 130.3 126.3Share of results of associates 0.1 -0.5 4.3 11.6 Non-current liabilities 79.2 71.5 71.1 71.0Profit before taxation 23.0 29.3 22.9 28.9 Total liabilities 229.1 215.9 201.4 197.3Tax Expense -4.7 -6.7 -3.9 -4.9 Total equity 127.6 143.8 155.9 173.1Net profit 20.0 21.6 18.7 23.7 Total equity and liabilities 356.8 359.7 357.3 370.3
CASH FLOWYear Ended 31 Dec (S$m) FY10 FY11 FY12F FY13F KEY RATES & RATIOS FY10 FY11 FY12F FY13F
Profit before taxation 23.0 29.3 22.9 28.9 EPS (S-cents) 6.4 6.6 5.5 6.9Adjustment 3.0 -0.7 -0.2 -18.9 NAV per share (S-cents) 40.7 43.9 45.6 50.6Change in Working Capital 31.2 -6.0 -8.7 -31.8 PER (x) 3.9 3.8 4.6 3.6Operating cash flow 53.6 20.4 11.0 14.9 P/NAV (x) 0.6 0.6 0.5 0.5Investing cash flow -4.8 -2.8 -4.3 -4.3 Gross profit margin (%) 9% 12% 9% 9%Dividends paid -8.7 -7.0 -6.8 -6.8 Net profit margin (%) 6% 8% 8% 11%Financing cash flow -14.2 -24.2 -9.2 -9.2 Net gearing (%) 14% 14% 15% 12%Net change in cash -5.2 -8.8 5.9 1.5 Dividend yield (%) 8% 8% 8% 8%Cash at beginning of period 48.8 83.3 72.0 69.6 ROE (%) 16% 15% 12% 14%Cash at end of period 83.3 76.5 69.6 71.0 ROA (%) 6% 6% 5% 6%
Source: Company data, OIR estimates
Page 25 3 June 2011
KSH Holdings Ltd
For OCBC Investment Research Pte Ltd
Carmen LeeHead of ResearchPublished by OCBC Investment Research Pte Ltd
SHAREHOLDING DECLARATION:The analyst/analysts who wrote this report holds NIL shares in the above security.
RATINGS AND RECOMMENDATIONS:OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and tradingoriented.- However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-monthinvestment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10%from the current price; Sell = More than 10% downside from the current price.- For companies with less than S$150m market capitalization, OIR’s Buy = More than 30% upside from thecurrent price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from thecurrent price.
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