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
■ 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.
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
applied a 20% discount to the RNAV of Keong Hong’s local residential and hotel property
developments. (Read Report)
Source : UOB KayHian Research
Labels: keong Hong Holdings, Multi-Industry