KSH Holdings: Living on past order books

YoY earnings growth, ex non cash items. In FY09, KSH’s revenue jumped 80.6% YoY from S$176.5m to S$324m, which was within our expectations. This is attributable to the significant increase in revenue contributed by construction business in Singapore, which accounted for 98.6% of revenue. Gross profit margin remained relatively stable at 10.4% in FY09, similar to FY08 levels. PATMI came in at S$14m, down 55% YoY from S$31.4m in the previous year.

Stripping away non cash items such as revaluation gains or losses of investment properties, fair value gain of embedded derivative on convertible notes and imputed interest on convertible notes under interest expense, PATMI would have surged from S$5.8m in FY08 to S$17.2m in FY09. Doubtful debts expense increase. KSH’s doubtful debts expense jumped from S$0.081m in FY08 to S$0.765m in FY09. Upon checking with management, approximately 90% of the doubtful debts expense is due to delays from China’s customs to return deposits placed with them previously.

Fair value loss on investment properties. KSH recorded a fair value loss of S$3.8m on its investment properties in FY09 versus a gain of S$43.5m the prior year. This is unsurprising given the negative sentiment on the property market in FY09 versus FY08. Final dividend of 2 S¢ declared. KSH has declared a final dividend of 2 S¢ per share for FY09. In addition to the previously declared interim dividend of 1.5 S¢, dividend yield works out to 12.3%.

Competition to heat up? In response to our query on whether competitors are slashing margins in order to win projects, KSH management said they have yet to see that. Going forward, management will capitalise on KSH’s A1 grading under CW01 category for general building to tender for government projects of unlimited value. This is a move to restrict competition (about 40 contractors are currently awarded the A1 grading), as well as to ensure collection of payments.

Maintain NEUTRAL. We are revising our FY10 earnings slightly down by 1.1% to S$14.5m (- 55.4% YoY), while introducing our FY11 earnings estimates at S$13.6m (-6.4% YoY), in view of a lack of earnings visibility with the economic downturn. We have assumed the conversion of the warrants that KSH has issued will take place equally over the current three year. Applying a P/E multiple of 5x FY10 earnings (peers trading at 8x), we arrive at a target price of S$0.29 (previously S$0.11). Maintain NEUTRAL.

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