KSL HOLDINGS BERHAD AGM on 23 June 2015 and field trip

KSL HOLDINGS BERHAD AGM on 23 June 2015

Questions addressed to the Chairman during the AGM

1.    The Klang mall, said to be 2.2mill square feet slated to be completed by 2018. 

o    What is the budget and can you honor your dividend payout of 40% of non-fair value gain profit?
Answer: The mall will be completed in two phases. Phase one will be 1.1mil sq feet and phase 2 will also be 1.1sq feet. The budget for Phase one is approx. RM500-600mil. We will continue to honor the budget of 40% of dividend payout ratio. (editor’s note: when approaching the IR later on, he mentioned that KSL’s strategy is to sell service apt/ SOHO on top of the mall to help finance the mall)

o    When will be the next cycle of major renewal on lease rental of your KSL mall?
Answer: KSL City mall tenancy agreements are renewed on a 1-2 year basis.

o    How do you plan to compete with nearby malls like AEON mall and IOI city mall? What will be the competitive advantage?
Answer: We intend to duplicate our current JB KSL City mall success in Klang

2.    In the latest Q report, there was a new "current other asset" of RM127.8mil. Please explain.
Answer: MASB 32 – Adjustment for the difference between revenue and progress billing received from on-going projects.

3.    Looking at the number of IP you will have in the coming years, do you have any plans to transfer into a REIT for tax savings for your shareholders?
Answer: There are currently no concrete plans to transfer to a REIT. Still under discussion. (Editor’s note: when speaking to the outsourced IR CEO later, he mentioned that they do have intentions to set up a REIT as they have their KSL City mall & hotel and two other investment properties in the pipeline (KSL Mall@Klang and KSL Residence@ Daya hotel)

4.    Given the slowdown in the property market, especially in Johor due to the iskandar hype, do you see your launches and sales slowing down?

o    Are you able to maintain your current sales and revenue target given the soft market?
Answer: We do not deny that the property sales in Johor has slowed down in current months. However we emphasise that we are in the affordable market of approx. RM500k/ unit. Therefore we will still be able to capture sales

5.    What is the total launches by GDV for 2015 - 2017 and what is your expected sales? 
Answer: Please inquire of our CFO for the details. (Editor’s note: the CFO asked to email, however, not sure if will get the list)

6.    I think your share price is pretty low given investor sentiment on pd. Why aren't you buying back shares more aggressively?
Answer: Looking into that. We are buying back shares to stablise the price (editor’s note: the answer here is weak)

7.     In your annual report and on your website, I only see 5 townships: kempas indah, bestari indah, nusa bestari, canary garden and mengkibol. However I read that you have many fragmented land banks in Johor, maybe such as maharani Rivera. Are there any other developments and how can we find out more about them? In recent times we have bigger projects and cannot afford to explain all of them in our annual report.
Answer: Please see our CFO for further details. (Editor’s note: CFO mentioned that there are over 100 land banks. The list of land banks is disclosed during the analyst briefing 4 times a year during the Q result season. For the smaller land banks in small towns, the development is not advertised in the website, but locally through local advertisements. They take their time with development with the smaller land banks but their biggest developments are the 4 townships and the 5 high rises (which are also part of the township).

  

OPINION:

Investment properties

The investment property will weather the slow-down in property development. KSL Hotel is doing well and as based on our experience the product is value for money. KSL mall, is akin to Sungai Wang in KL where you can see a lot of cart stalls along the corridor. A few retail investors from Johor (one of them being the ex-tenant of KSL City Mall) mentioned that for the past few years the management has been increasing the rental rate. There is no room for negotiation for the rate. Those who can pay will get a place. We were informed by the retail investors that the Mall traffic has gone down for the past 2 years. This is due to the re-opening of JB City Square which is owned by GIC Singapore. KSL City Mall did very well during the first two years as JB City Square was undergoing a major Renovation. After JB City Square reopened, the traffic in KSL City dropped. However, during our visit, the mall is still quite packed on a Tuesday afternoon. A call to their leasing department shows that rental ranges from RM18-20psf for sizes between 500-100 psf for upper floors. For restaurant at LG, rental rates are about 20-30psf for large lots (1000sqft and above). This is on par with upper market malls like One Utama which ranges from RM20-30 psf but also depends on location as well as brand (KSL doesn’t ask about brand).

A check on JB city square website shows that they are more up-market mall. There are branded shops like H&M, Starbucks & Coffee Bean, Mc D, Uniqlo, Cathay Cineplex and etc.  Potential threat from future opening of Midvalley Megamall (JB) which will be a duplicated version of their flagship project in KL except that it is 30% smaller, is slated for opening in late 2016. However, KSL City Mall may still meet the middle Chinese market which looks for value for money and more eastern influenced fashion products.

Going forward, the Group has confirmed mall in the future which is KSL Klang, which is about 2.2mil square feet and will be developed into two phases of 1.1mil each. The capex for the first phase is RM500-RM600mil. It is also confirmed that there will be a hotel of 288 rooms (relatively small compared to KSL Hotel of 868 rooms, hence smaller capex) at KSL residence @ Daya.   

There will be a potential smaller size Mall/ hypermarket at KSL resident @ Daya as well as a potential hotel on top of the KSL Klang Mall project.

The mall in Klang could be successful as the population and demographic is roughly the same as JB. Aeon mall Klang which is the largest Aeon mall in Klang with 2.1mil sqft is slightly more upmarket than KSL’s.  Another competitor will be IOI City mall but it requires 30mins drive from KSL mall. Klang has a population of 1.2mil (JB’s population is 1.5mil) and therefore there is sufficient demand for the mall. However, there are doubts that the hotel component on top of the KSL Klang Mall may do well. WCT has a hotel in Klang named as Premier Hotel which is a 4 star business hotel. Its latest annual report shows they managed to chalked up 61% occupancy rate with average room rate of RM260.

Property Development

The risks for KSL are that the slowdown in the property market will result in lower sales (from tighter bank lending and loan rejections) and therefore future lower revenue. Given the projects that we visited, at least according to the sales staff, sales is slow but reasonable:

• ·     Kempas indah - D’secret garden (high rise) GDV of RM800mil with 80% sold. Target completion in 2016
• ·   Nusa bestari - D’inspire residence (high rise) GDV of RM500mil 85% sold. Target completion Aug 2015
• ·   KSL Residences @ Daya GDV of RM714 mil with 60% sold. Target completion in mid-2018
• ·             Bestari Indah (landed) GDV of RM200mil in two parts. Parcel 1 has 80-90% sold and Parcel 2 has approximately 30% sold (launched in Mar 2015)

Revenue for 2014 full year is RM800mil with a core (non-FV gain) profit of RM250mil (31% net profit margin).

• ·    Looking at sales figures, achieving the same results as 2014 probable in 2015 (no implied growth)

• ·     However in 2016 onwards, cash flow will suffer and 2014-2015 sales may not be able to sustain 2016 revenue

KSL’s strategy is to buy land at poor locations (hence potentially cheaper price) and develop premium products on that land. Their marketing strategy is plain vanilla, for example large ad billboards, and heavy marketing in their shopping mall to showcase their products. They also engaged some sales agencies like GS Realty. Feedback from one of the sales person from KSL sales office saying that GS Realty is pretty aggressive and they could sell average of 1 unit per day for KSL residence  @ Daya. KSL has a marketing strategy of marking up the property’s sale price and thereafter giving the purchaser a 20% cash rebate (zero down + 10% cash back) and refunding interest installment payment (alternative form of DIBS).

According to Kenanga report dated 8 June 2015, there are unbilled sales of RM847mil. Unbilled sales alone will not be sufficient for them to meet expectation of continuous growth. The response to 2015 launches are quite weak (Kenanga: RM149.9mil sales for 1Q15) and only RM50+mil (info obtained from sales office) of GDV launched in 2015 so far (instead of RM14mil stated by Kenanga). Future launches info is still pending from IR personnel but based on Kenanga, there is RM700mil planned launches in 2H2015.  Inventories may increase significantly, for example D’inspire Residence if the balance of 30% of Block B units still cannot be sold. 

A check with Klang’s sales office shows that Maple residence with RM500mil GDV has chalked up 30% take up rate from the soft launch recently.  I believe this figure is not included in the unbilled sales as it is only soft launch and this project will drive the sales for 2015.

Catalyst

Possibility of injecting their investment properties is there to crystallize their asset and also to meet future capex requirements, especially for Klang project.

Conclusion:

Bottom line, KSL will not be having a slump like Country View Berhad in near future as few project launched can sustain them for a few years. Whether KSL can achieve sustainable growth will depend on their future property launches. KSL Klang is crucial to drive their future growth. Hence monitoring KSL Klang project closely is imperative. Cash flow will be pretty tight given capex requirement of RM500-600mil for phase one of KSL Klang mall and sluggish sales for Daya (sales office mentioned 60% but to be more conservative, we assume 50% take up. They are close to break-even hence they need to fork out capital for the hotel).

As previously iterated, the main strength of KSL is buying property in cheap locations and building premium products with low land cost. To date, that model is serving them well. Also, KSL still has vast amounts of cheap land banks for future development

Investment properties will cushion the slow-down in property development and provide cash flow support for the group. If the company successfully launch the REIT, this stock could be re-rated.

Finally, as the board has committed to a 40% payout of non-cash FV adjusted profits, expect at least a 10cent yearly payout for 2015 if profit matches 2014, which is equal to a reasonable 5.7% dividend yield based on the closing price of RM1.75 at the time of this writing.

Appendix – notes on research

Property Investment:

1.    KSL City mall

·         The mall has a Sungai Way/ Berjaya Times Square feel with lack of tenant control and heavy Chinese influence.

·         There are a lot of cart stores and walkways are cramp

·         Traffic flow was surprisingly heavy given it was a Tuesday afternoon (I dare say better than 1Utama mall on a weekday)

·         Most of the products are low margin. Nothing too luxurious

·         Has MBO cinema and Tesco as main tenants

·         Significant marketing of their other KSL products in the mall

·         Tenancy rate was high – only the really back corner lots were empty besides those which were boarded for renovation

2.    KSL hotel

·         Hotel occupancy was approx. 40+% on the night we stayed. Reception was unable to give us a yearly occupancy rate. On the next day we checked out, the occupancy rate was 46%.

·         Hotel room had a 4.5 star furniture and fixtures feel however you could tell that they are skimping on certain services such as thin worn out towel, cheap soap, the shower water couldn’t get hotter than a certain temperature and the toilet (bowl) could have been better designed

·         The corridors looked high class

·         The swimming pool looked a little tacky/ cheap

·         Spring beds – not bad, however not the best

·         Free Wifi was poor

Property developments:

We went to the sales office and obtained the following information.

Bestari indah GDV RM208mil

·         715 acres, 1/2 not developed yet

·         Currently 5000 developed houses

·         Discount of 20% given. Marked up so that even with 80% loan, it is still zero down.

·         Bestari indah house, grows for an intermediate 508-518K net price. Gross is 20% higher

·         Puteri park launched approx 500 units with only 10 Bumi units left (22X70)

o    (24X80) 84 units remaining still a lot 668k after 20% discount launches in March n May 2015

·         Coming soon, cluster homes 84, 4 units bungalow and 4 semi D

·         Bestari indah jasmine, 10 ish units left

·         Approx 90% sold, since March 2014

·         Bestari Indah Jasmine - everything relates to purchaser except loan stamp duty will be borne by KSL

·         Puteri park loan and spa' stamp duty need to be paid by purchaser

Kempas indah - d secret garden GDV RM813mil

·         Construction progress:

• Car park completed (an annex building next to the condo)
• Block:
• a: 15^th floor out of 29-storey
• B: 16^th floor out of 29-storey
• C: 17^th floor out of 29-storey

·         80% sold

·         Approx 600PSF after discount

·         Discount of 20%

·         Form of DIBS through reimbursement to the owner

·         Spa and legal fees free

·         First year maintenance free

·         MOT fees will have to be paid later – approx. RM20k for 800k unit

·         Approximate completion in 2016

·         Discount of approximately RM200k for carpark view units.

D'inspire at nusa bestari RM495mil GDV

·         Currently having special promotion:  [20% rebate with 2 years guaranteed 8%] or [25% discount flat] 

·         Two blocks, block A 97% sold and block B 70% sold

·         To be completed in August 2015

KSL residence @ Daya

·         Launched May 2014

·         Currently construction at ground work and to be completed in 2017/mid 2018

·         Sold 60-70% sold but some switching to other units 

·         Next to small Indian grave yard 

·         Potential shopping mall next to Daya

·         20% discount

·         Net price roughly 580K

·         One car park

·         Interest reimbursement

·         Main competitor is kek seng

o    Also setia indah

·         Loan rejection about the same as last year

·         Numerous number of Singaporean investor but no concrete figure

·         Freehold