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Sunday, September 28, 2014

This undercovered GEM has more than 50% UPSIDE!


This gem has been undervalued for far too long. It goes back to 2008, before the emergence of Mark Mobius in 2010 as a shareholder. Yes, it is none other but Mark Mobius himself, the famous fund manager of Franklin Templeton, the executive chairman of Templeton Emerging Markets Group. Mark Mobius was so impressed with KSL after meetings with the key management and bought a 5% stake into it. He then promised to hold the stock for very long term, seeing that it was so undervalued at PE of less than 5 times, with high growth potential and recurring income. This was followed by Public Mutual and Julius Baer with significant stakes held until today. In the last two months, some have taken notice of it, but it is still very undervalued.

Today, unlike in 2010, KSL has high level of recurring incomes, thanks to its prudent managemnt, who built KSL City Mall and Resort during the financial crisis. For FY 2013, recurring income was RM135mn, with 15% growth expected for the next three years. Recurring EPS was 15sen and recurring FY 2015f EPS is 20sen. Assuming 6% yield, its investment properties are worth RM1.3bn or RM3.33 per share. At current price of 4.66, its property development business is selling at RM1.33 or RM519mn only. With RM519mn, you can own more than 2,000 acres of land in Johor and Klang Valley worth more than RM10bn GDV. The 446acres land at Klang alone is worth more than RM1bn. If this is not undervalued, I don’t know what your definition is for undervalued!

KSL management is smart, and they knew it is not yet the right time to do a REIT offering as the mall and resort is still recording double digit growth. Probbly next year or 2016 is the best time. Furthermore, recurring income is expected to MORE THAN DOUBLE after the completion of KSL City Mall 2 in Klang, due to start construction next year. With over 1.8mn retail space, the new mall is 3 TIMES the size of KSL City Mall in Johor.

Having been undervalued for more than 5 years, KSL finally started to move in July this year, thanks to articles by The Edge and The Star and a report by Kenanga. The gem, having been uncovered, still has not yet reached its fair value! Why? This is because it is still undercovered! Only Kenanga, the most enterprising research house today, came out with a fair value, at RM6.63, a 50% discount to its RNAV of over RM13.

The longer a stock is undervalued, the longer and higher it will go in order to reach its fair value. A good example is Scientex. The stock has been selling at only 5x PER for several years and after being discovered, it promptly move up. But not in several days or months. After more than 1 year, it is now selling near its fair value. Today, Scientex is selling at 2.2x P/B and 12x PER.

It is time to revise my target price for KSL. Assuming 2014 EPS of 72 sen, the fair value for KSL is between RM7.20 and RM8.64 with PER of 10-12x. My forecast for EPS is conservative, judging its unbilled sales of RM1bn (RM1.5bn by year end) which ensure earnings for more than 2.5 years. Another catalyst is dividend. At 30% dividend payout, yield is very high, at 4.5%, for a property developer! Both unbilled sales and dividend yield are better than Mah Sing, though the latter is already impressive.

KSL should be selling at more than 10x PER due to its high returns and profit margins, earnings visibility and increased recognition after the management opened up to fund managers and analysts. With target price of RM7.20 to RM8.64, KSL offers upside of more than 50% to the patient investors.

Earlier article

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