KSH Holdings' lacklustre performance won’t last for long

Expect stronger performance sequentially

KSH reported 1QFY12 earnings that were below expectations at S$2.6m, down 38.5% YoY and making up only 10.9% of our FY12 earnings estimates. However, we remain confident of a better performance sequentially, as the lacklustre performance of 1QFY12 is mainly due to the timing of recognition of its construction projects.

We trim our FY12 earnings by 5.5% to factor in lower construction margins and estimate a development surplus of 5.3S¢ per share, on the back of contribution from four property development projects. We estimate construction would contribute 72% of FY12 earnings, with property making up the rest.

Based on our SOTP valuation, our TP of S$0.31 is maintained as we value its construction segment at 5.5x FY12 earnings, in line with its peers. Maintain BUY on the back of the attractive valuation of KSH (trading at 3.4x prospective earnings), amidst sustained construction demand.

1QFY12 earnings below expectations. 1QFY12 earnings were below expectations, coming in at S$2.6m (-38.5% YoY), due to a 43.7% drop in construction revenue with the completion of several projects.

Strong order books and track record. KSH has S$350m worth of construction projects on its order book, from both the public and private sectors, stretching over the next three years. With KSH’s strong track record (it secured the S$138.4m construction project for Eight Courtyards in Jun) and sustained construction demand from public projects - the public housing project roll-out, we believe it would continue to be able to secure more projects moving ahead.

Property contribution to kick in. 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). We believe the property development segment would boost KSH’s bottomline in the next few years.

Trimming earnings on lower construction margins. We trim KSH’s FY12 and FY13 earnings by 5.5% and 10% to S$22.5m and S$25m respectively, on the back of lower gross margins (11.5%, -2.6ppt) for the construction segment with inflationary pressures on business operations.