KSH Holdings (OCBC)

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 manages 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. Final ly, 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 overlypunishing discount to its development business.

HOLD due to flagging drivers. Over the longer term, we believe the price would ref lect the value of i ts 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)