Thursday, March 7, 2013

Keck Seng Coming To A Boil

If you recommend something 6 months ago and it really moved in the past week ... is that good? If someone collected 12 months ago, but only moved now, is that good play? Readers will know I don't advocate a buy and hold strategy, you can and you will actually see things happening if you pay close attention. 

Keck Seng is coming to a boil, you can feel it in your bones (particularly if you are an old man investor with arthritis).

Not many reports out there, actually just one I can find by Hwang DBS, good call dude considering this was a report in December 2012, and just in time with the "dividend issue".

HDBS Research:

Major re-rating catalyst from potential bumper dividend by FY1 

Potential M&A target with 83% of market cap in liquid asset (RM1.90/share net cash, RM1.32/share investment) 

Deep value from Johor land bank with significant upside potential 

Fair value of RM6.00, based on 30% discount to RM8.50 SOP-derived valuation 

Strong fundamentals. Strong fundamentals. . . Keck Seng (share price RM3.87, market cap RM1,399m, 42% owned by Ho Kian Guan & family from Singapore) is an asset-rich conglomerate focusing on: 
i) upstream plantation, ii) property development and investment, iii) hotel and property investment, and iv) plantation-related manufacturing business. Its 9M12 earnings rose 7% y-o-y to RM60m despite the weaker CPO price, underpinning its resilient business. 

Primed for re-rating  with bumper with bumper with bumper cash dividend dividend dividend.... Keck Seng could declare a bumper dividend of RM359m or 96 sen/share by virtue of its section 108 balance which will be expiring by Dec13. Keck Seng will be better off making full use of the credit balance as any unutilized credit balance will be forfeited. 

We believe that the potential windfall is likely given: (i) solid RM699m net cash position (as at Sep12), (ii) low capex requirement, and (iii) strong reserves for franked dividend (RM1.2bn retained earnings). Potentially, Keck Seng could be a privatization target given its rich embedded value with 83% of its equity value already held in liquid asset (refer to table below). 

Significantly undervalued land bank in Johor Significantly undervalued land bank in Johor d bank in Johor. Its 1,850 acres of prime Johor land bank surrounding Johor Bahru has not been revalued for the past 32 years (RM0.5-RM4psf book value). Current share price implies a grossly undervalued RM2.70
psf (>RM20psf in Johor Bahru currently) valuation for the land bank which is totally unjustified. Robust development in Iskandar Malaysia with the completion of catalytic projects such as Legoland and Coastal Highway is set to further propel Keck Seng’s land price appreciation. We estimate that every RM5psf land price increase will boost our fair value by 12%. 

Attractive entry level. We arrive at our fair value Attractive entry level. of RM6.00, based on 30% discount to our conservative SOP valuation of RM8.50. Valuation is attractive currently at a steep 54% discount to SOP, 9x FY12 EPS (ex-cash) and 0.8x FY12 BVPS vis-à-vis its peers’ 10x FY12 EPS and 1.1x FY12 BVPS (Boustead and Oriental Holdings). We believe that Keck Seng is primed for a major re-rating with potential dividend windfall for shareholders. We recommend that this is an opportune time to accumulate to ride on the catalyst as the market has yet to appreciate its full potential. 

Investment securities. There is RM477.5m worth of i Investment securities nvestment in securities, consisting of shares in listed companies such as 
Chin Teck Plantations (3.1%), PPB (0.4%), Singapore-listed Parkway Life REIT (1%) and Hong Kong-listed Shangri-La Asia (0.02%). These investments work out to be RM1.32/share, in addition to its enviable RM1.90/share net cash. At current market price, its liquid assets already make up 83% of its equity value. 

The best is yet to come. Keck Seng’s crown jewel li The best is yet to come es in its significantly undervalued land bank of 1,850 acres (Taman Daya, Kangkar Pulai and Pasir Gudang) surrounding Johor Bahru which was booked at only RM2.30psf. In tandem with the skyrocketing property prices, its Johor property development is set to benefit the most with increasing profit margin (from 25% in FY09 to 27% in 9MFY12). In addition, its 9MFY12 property earnings has also surged by 39% y-o-y to RM29.1m, despite the concern on softening property market outlook since early this year. We believe that its property development will continue to do well, buoyed by healthy demand in the Johor residential segment. 

Stable income from investment properties. Its flags Stable income from investment properties hip office building, Menara Keck Seng in Jalan Bukit Bintang has been enjoying stable occupancy, thanks to its strategic location in the central of golden triangle in downtown KL which is right in front of the Pavilion KL Shopping Center. Meanwhile, the residential apartment, Regency Tower in Jalan Ceylon which has undergone refurbishment in 2011 should enjoy better occupancy though new condominium supplies in the area could affect its tenancy. Menara Keck Seng (1996 completion) and Regency Tower (2006 acquisition) are currently recorded at its respective cost value, implying significant potential revaluation gain. 

Wildcard in plantation estates. Keck Seng sold 181 acres of its plantation land in Ulu Tiram in 2005 to the Johor state government for RM45.4m or RM620k/ha for the construction of Senai-Desaru Highway. This compares to the book value of its 3,300ha plantation land of merely RM10-18k/ha. We believe that there is significant commercial value for ts plantation land given the strategic location in Ulu Tiram which is located within the vicinity of Tebrau area. Notwithstanding the potential of property development, its well-managed plantation estates are still providing healthy recurring income (21MT FFB yield), contributing 29% of its 9MFY12 earnings. 

Strong rebound from hotel portfolio. portfolio. portfolio. Keck Seng’s newly-renovated Doubletree Alana Waikiki Hotel in Hawaii is expected to continue with the improved performance due to higher occupancy rate and average room rate. Its Tanjong Puteri Golf Resort has also turned around from losses after major renovation in FY11 as well as better accessibility with the opening of Senai-Desaru Highway last year. The hotel segment posted a RM9.6m operating profit in 9MFY12 (vs RM2.2m loss in 9MFY11), surpassing its FY10 and FY11 hotel full-year contributions.