In my previous article, I gave an overview of the Malaysia Housing Market outlook highlighting that the current housing market is heading to stagnation and there are no signs of recovery yet. Worse still, Bank Negara Malaysia (“BNM”) has announced an increase of key interest rate to 3.25% on 25 January 2018. In this article, I’ll be sharing my insights on a property development and investment company, KSL Holdings Berhad (KLSE: 5038). The Company is incorporated in the year 2000 and listed in Main Market of Bursa Malaysia on 6 February 2002.Like many property stocks in Malaysia, KSL Holdings Berhad (“KSL” or “the Company”) have suffered a significant sell down of shares from its peak of RM2.44 per share in September 2014 to a low of RM1.01 per share at the time of writing. No thanks to the overall poor housing market sentiments in Malaysia which have led to the Company stopped paying dividends.
So what makes KSL different from other property development companies in Malaysia? Here are the 5 key insights about the Company that I think it is quite unique from other property developers.
#1: Mixture of Development & Investments
Property sector is cyclical and usually, it took a very long time to recover. That’s why when looking for property stocks, the first criteria would be “Liquidity”. Companies in property sector could easily go bust if they do not have a stable source of income to tide them through the current bearish condition.KSL is unique in the sense that about 24% of its total revenue comes from investment properties (i.e. rental income, car park and hotel operation). While this is not much, it does help to weather KSL’s property developing segment.
#2: Low Land Costs
(Source: Company’s Annual Report)
In a bearish property market, everything is about controlling your costs in order to increase your profit margin. KSL have a relatively low land costs which could provide them some form of flexibility in their property pricing.
(Source: The Edge Malaysia Weekly)
A quick comparison against its peers, you will notice that KSL’s profit margin is one of the highest among others.
#3: Rising Inventories
KSL have been suffering from lower sales since year 2015 leading to its inventories (mainly “property held for sale”) skyrocketed, especially in the financial year ended 2016. One of the reasons are the changing market trends where the demand is towards the “affordable” segment (i.e. price of RM300K and below per unit) but KSL’s property projects are focusing on mid to high-end segment (i.e. price of RM500K and above). Such mismatch is unavoidable especially when currently there is an oversupply of mid to high-end residential properties in Malaysia. Projects will have to be delayed.
Interestingly, KSL recently announced its intention to relaunch high-end condominium (“18 Madge”) at Jalan Madge in the third quarter of 2018. The high-end condominium was launched in 2016 and is put on hold due to poor market condition.
#4: Net Cash Position
(Source: Company’s Annual Report)
In its 3Q2017, the company received a lump sum of approx. RM235.8 mil from its receivables. The cash received were then used to pay-off KSL’s borrowings. Going forward, we should see lower interest payment. Such capital allocation behavior demonstrated by the Management is a plus point, particularly when the current market is down. You do not want a significant portion of your already low income goes to servicing your debt.
#5: Historical Low Price-to-Book Ratio
So, is KSL cheap? At the time of writing, KSL trades at PB ratio of 0.40 times which is the lowest since sub-prime crisis in year 2008/ 2009. In my opinion, it is dirt cheap BUT it is cheap for a couple of reasons and one of it being the oversupply of mid to high-end residential properties which is what KSL’s development projects are focusing on. There are no signs of recovery yet.
Another reason is KSL’s dividend payment that has been halted since 2016. Despite the Company announced a dividend policy of 40% in year 2015, this has not been followed through since then.
Is the market being rational or irrational about KSL? In my opinion, it is somewhat in the middle. The Company seems to have the right business model (stable income from its investment properties which helps to tide through the current bearish property market), low land costs and most importantly, healthy balance sheet.
However, there are many risks that you should consider before jumping into it. One of it is the management’s alignment of interest which is questionable. The Management is seen paying themselves a hefty sum of salaries (i.e. approx. RM10 mil) despite poor results while not declaring any dividends to shareholders in year 2016.
Overall, KSL was a fair company that has been temporarily beaten down by the property market. You just have to pay close attention to any signs of recovery in the property market.
If you would like to receive more key insights article, do subscribe to this website. You can also check out some of my past articles on REITs or increase your investing knowledge by browsing through my articles on Investing 101.