Projects’ completion affected 1QFY10 revenue. Revenue was down 29.6% YoY on the back of completion of four projects which more than offset the increase in revenue from on-going projects. These include Tampines 1, Forte, Platinum 28 and The Coast at Sentosa Cove. However, construction’s gross margin improved from 7.6% in 1QFY09 to 12.2% in 1QFY10, attributable to cost control management. Consequently, PATMI was up 16.4% YoY from S$2.4m to S$2.7m.
Healthy order books provide some visibility... KSH’s order books stand at S$439m as at Jun 09, of which a significant proportion would be carried out in FY10. According to Building and Construction Authority’s (BCA) forecasts, public sector’s construction demand is expected to make up at least 60% of total forecasted construction demand of S$18-24b. While the public sector is driving construction demand currently, things may be looking up for private sector construction demand. URA Statistics indicate that developers sold 1,825 units of new homes in Jun, up from 1,673 units in May, with a monthly take-up rate surpassing the high of 1,731 units recorded in Aug 07.
... but EPS will be diluted. We understand from management that they have been busy recently tendering for projects (~S$750m in 1QFY10), with approximately 70% of the tender projects coming from the private sector. This is in line with the current pick up in private sector sentiment that has been reported in the media recently. While we have kept our earnings unchanged, we have now conservatively assumed full conversion of the warrants in FY10 (versus 33% previously) as only 38% of the warrants issued in April are outstanding. KSH’s construction peers are trading at 8.3x current year P/E. Ascribing a P/E multiple of 8x FY10 earnings, we arrive at a target price of S$0.33 (S$0.29 previously). Maintain NEUTRAL.
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