KSH Holdings: Wins S$49.9m Mount Alvernia Hospital contract (DMG)

(BUY, S$0.215, TP S$0.31)

KSH announced that it secured a S$49.9m building contract by Mount Alvernia Hospital. This win boosted its order books to >S$385m, up 10% from Jun 11. No change to our earnings estimates. We estimate a development surplus of 5.3S¢ per share, on the back of contribution from four property development projects. We expect property to give earnings a lift for the next few years. Based on our SOTP valuation, our TP of S$0.31 is maintained as we value its construction segment at 5.5x FY12 earnings. Maintain BUY on the back of the attractive valuation (trading at 3.4x prospective earnings).

Diversification of its order books. KSH was awarded a S$49.9m contract to construct an extension to the front lobby of Mount Alvernia Hospital and an extension to the side entrance. In addition, KSH will also be constructing a new medical suite block, all to be carried out over 23 months. KSH’s latest win lifted its order books to >S$385m worth of construction projects (+10% from S$350m in Jun 11) to be fulfilled by May 2014. KSH’s efforts to diversify its construction order books from private residential projects is bearing fruit, with 76.9% of its order book being attributed to private residential projects, 13% from private non-residential projects and 10.1% from public sector projects. With KSH’s strong track record (it secured the S$138.4m construction project for Eight Courtyards in Jun) and sustained construction demand, we believe it would continue to be able to secure more projects moving ahead.

Property to be earnings booster. Last week, KSH as part of a consortium, purchased Hong Leong Garden Shopping Centre for S$171.1m. The consortium intends to redevelop the property, in which KSH has an effective stake of 12.25%. Funding would be via borrowings and internal cash – not an issue for KSH which has a low net gearing of 0.1% as at Jun. We believe the property development segment would boost KSH’s bottomline over the next few years. We have assumed S$6.3m pre-tax earnings contribution from four of KSH’s property development projects, namely Lincoln Suites (Khiang Guan, off Newton Road), Cityscape @ Farrer Park (Mergui Road), The Boutiq (along Killiney Road) and Development 26 (at Geylang Lor. 26).