Keong Hong Holdings - Deep Value Contractor With A Diversified Portfolio Of Quality Assets

We initiate coverage on Keong Hong with a BUY and target price of S$0.565. Keong Hong is a BCA A1 grade contractor with an operational track record of more than 30 years. The company forayed into the property development sector in 2012, and is now starting to see the fruits of its labour with bumper profit set to kick off in FY15 as its property development projects obtain TOP. Its diversification into hotel investments locally and the buoyant tourism sector in the Maldives also brings a recurring stream of future income to the group, underpinning its ability to continuously pay dividends.

INVESTMENT HIGHLIGHTS
Deeply valued diversified assets. We initiate coverage on Keong Hong with a BUY and target price of S$0.565, which is based on a SOTP valuation. Keong Hong is a BCA A1 graded contractor with an established portfolio of projects which includes Martin Residences, IBIS Hotel, and J Gateway. While sentiments remain lacklustre over construction stocks, we believe the group has executed its diversification well, with exposure in the construction, property development, hospitality and airport operations which is leveraged on tourist arrivals.

■ Earnings visibility until FY16-17. Keong Hong has interests in seven residential and hotel development projects secured through strategic partnerships with its major customers (property developers). The completion of property development projects such as Twin Waterfalls and Skypark Residences in FY15 and FY16, coupled with a robust orderbook of S$322m as at 31 Mar 15, should have Keong Hong enjoying good earnings visibility in FY16-17.

■ Raising recurrent earnings. Through its JVs, Keong Hong is in the midst of developing two hotels at the former Joo Chiat Police Station (to be operated by InterContinental Hotels Group under the brands Hotel Indigo and Holiday Inn Express), an airport hotel and a resort hotel in Maldives. We expect this to bring a steady stream of recurring income to Keong Hong upon completion from FY16 to FY17. We have not factored in rental income contributions from the hotel developments, which may provide upside to our earnings forecast.

■ Consistently paying dividends. Despite being in a cyclical industry, management has consistently paid out between 18-28% of earnings as dividends. With the expected TOP of the Twin Waterfalls development project and Skypark Residences, we expect dividend yield to rise to 8.7% (S$0.039) and 7.3% (S$0.033) in FY15 and FY16 respectively, based on a 25% payout.

■ Strengthening its foothold in the local construction scene. In Mar 15, Keong Hong acquired 15.12% of Kori Holdings for S$6.8m. To recall, in Aug 13, Keong Hong also acquired a convertible bond of S$5m in principal amount of 5% due in year 2016. The convertible bond, if converted may boost Keong Hong’s stake in Kori by up to 25.8% of the enlarged share capital. Kori is an emerging underground specialist that provides civil/structural engineering services. Through its strategic relationships with main contractors, Kori has an impressive track record, having secured contracts for all three stages of the Downtown line.


Technical Analysis
Daily Chart
Valuation
We initiate coverage on Keong Hong with a BUY recommendation and SOTP target price of S$0.565, implying an upside of 25.6%. While sentiments remain lacklustre over construction stocks, we believe the group has executed its diversification well as the company now has exposure in construction, hospitality as well as airport operations which is leveraged on tourist arrivals.

We have benchmarked Keong Hong’s construction business to the long-term construction sector average PE of 5.5x and FY16F construction EPS of S$0.068, and applied a 20% discount to the RNAV of Keong Hong’s local residential and hotel property developments. (Read Report)

Source : UOB KayHian Research

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