KSH Holdings Ltd - Plumper margins despite slower revenue recognition (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$0.23

Fair Value: S$0.30

PATMI down 38% due to slower revenue recognition: KSH Holdings (KSH) reported PATMI of S$2.6m (EPS of 0.75 Scents) in their first quarter of the financial year ending 31 Mar 2012. This was down 38% compared to 1Q11 when they reported a PATMI of S$4.2. Revenue also fell 44% from S$71.0m a year ago to S$39.4m this quarter. We saw revenues fall mainly due to the lack of contributions from projects completing before and during 1Q12 which decreased the top-line by S$50.5m, partially offset to the tune of S$18.9m by projects that commenced after 1Q11 and those that progressed into more advanced stages of construction. We note that operating margins has improved to 10.2% in 1Q12 compared to 7.1% in 1Q11 due to more profitable projects and a project nearing completion this quarter - the Education Resource Center project from NUS. Overall, 1Q12 revenue form 18% of our FY12 estimate and were somewhat below expectations due to slower-than-expected revenue recognition from the order book. We adjust our FY12 forecast down to reflect this but are not unduly worried since we expect the pace to pick up later.

Eight Courtyards to start construction in Dec 11. We estimate the order book to be at S$350m currently after the recent contract awarded for the construction of Eight Courtyards, a 99-year condominium project located at Yishun Ave 2 and Canberra Drive. The contract was awarded by Yishun Gold Pte Ltd, a joint venture company between Fraser Centrepoint and Far East Organization. Construction is slated to take place between Dec 11 and May 14 and, with no projects nearing completion in the next two quarters, we expect the pace of construction revenues in this quarter to set the pace for the remainder of 2011.

Scrip dividend scheme approved. KSH also recently announced that it would apply the Limited Scrip Dividend Scheme to the final tax exempt one-tier dividend of 1.0 S-cent for the last financial year at a price of S$0.245 per share, whereby shareholders may elect to receive their dividends in cash or KSH shares.

Maintain HOLD at 30 cents. We continue to see significant value in KSH but remain cautious due to macro-economic uncertainties and a possible inflection point in private construction demand from slowing private residential trends. 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 update assumptions in our model and maintain a HOLD rating on KSH with a revised fair value estimate of 30 cents versus 31 cents previously.