KSH Holdings Ltd - Upgrade to BUY (OCBC)

Upgrade to BUY

Previous Rating: HOLD

Current Price: S$0.215

Fair Value: S$0.28

Limited impact from change of contract terms. KSH recently announced changes to the Eight Courtyards contract, whereby Phase 1 (temporary site office/temporary building works) and Phase 2 (alteration/additional works to the temporary showflat and sales office) would take place from 5 Sep 11 and 7 Sep 11, respectively, to 1 Dec 11. The construction dates for the main contract would remain from 1 Dec 11 to 1 May 14. We see little impact on revenue recognition from this change and hence keep our FY12-13 forecasts intact.

Capacity for more projects. From discussions with management, we judge that KSH has the capacity to take on two to three large contracts (>S$100m) and take its order book to S$600-S$800m. Given this, we believe KSH is actively tendering for contracts while judiciously keeping to a 10% profit margin hurdle. A recent spate of large condominium launches, such as Luxurie (622 units - Keppel Land), Boathouse Residences (493 units - Fraser Centrepoint, Far East) and EuHabitat (748 units - Far East), could offer tender opportunities for KSH. Note that the last contract (Eight Courtyards) clinched by KSH was developed by Fraser Centrepoint and Far East as well and we think KSH could be invited to tender for the Boathouse and EuHabitat.

Bidding for BTO contracts. Another source of potential contract wins could come from BTO contracts from the HDB. KSH had tendered for the last BTO contract at Punggol Water Terrace with its bid 5.5% above Tiong Seng's lowest bid, which came in at $146.6m or S$182.4k per unit. As HDB goes on to supply 50,000 BTO flats over FY11-12, we expect to see continued significant contracting activity going forward and KSH would likely be actively bidding for these contracts.

Little dilution from Scrip Dividend Scheme. KSH's shares had traded at a 10%-16% discount to the S$0.245 per share issue price for the Limited Scrip Dividend Scheme applied to the final dividend (1.0 S-cent) over 12 Aug11 to 5 Sep11. Hence we believe that few, if any, shareholders would have elected to receive shares in lieu of cash; little or no dilution would likely occur from this development.

Upgrade to BUY at 28 S cents. At this juncture, KSH is currently trading at a 49% discount to book value and 70% below our RNAV estimate. This notwithstanding continued sales at key development projects such as The Boutiq, Lincoln Suites and Cityscape@Farrer Park which are 65%, 77% and 20% sold respectively. Upgrade to BUY on KSH with a revised fair value of 28 cents (60% discount to RNAV) versus 30 cents previously.