Friday, June 18, 2010

KSL Holdings. Low profile, deeply undervalued.

(Business Times)CORPORATE Malaysia had hardly heard of KSL Holdings Bhd (5038) until, one fine day, the Johor-based property developer announced that Templeton Emerging Markets Group of Franklin Templeton Investments had bought a little over 5 per cent of the company.

What could have possibly caught the eye of the globally renowned fund management company that most of corporate Malaysia had missed?

Not just any executive in Templeton at that, but chairman Mark Mobius himself.

As KSL executive director Ku Tien Sek tells it, it was due to an unshakeable belief of Mobius that the Iskandar Malaysia development in southern Johor would boom.

"In his thinking, the next five years will see tremendous growth in Iskandar," Ku told an audience of analysts and fund managers in Kuala Lumpur yesterday.

KSL has four major projects in Iskandar Malaysia. It owns 446.8ha there.

And, as Ku tells it, it was a story right out of every listed mid-cap company's dreams.

"One fine day (last year), I was informed that Mark Mobius, not a managing director or anybody else but Mark Mobius, wanted to come and see us. So we made an appointment and he came, and we showed him our 'Tamans' (residential developments)."

Ku also remembers clearly a question Mobius asked him during tea after visiting KSL's developments.

"He asked me, 'Tell me what happened to you, Ku? Why is your stock like that? There are no related-party transactions or anything like that, and yet your share price is way below your net tangible asset value.'"

What ensued after that was an interview with Mobius, which entailed Ku describing in detail the company's processes and management controls.

According to Ku, what tipped the scale was when he explained that KSL bought its own building materials, which it then provided to its subcontractors, as a means of protecting the quality of its developments.

Impressed with the company, Mobius immediately declared his intention to buy a 5 per cent stake in the company.

"Mark Mobius promised me that they would be with us between five and 10 years until the com-pany grows to its potential," Ku said.

Read more: The Malaysian gem that Templeton spotted

Cheap valuation company is quite hard to find. Even you found it, you will have a lot doubts. Another value trap? Another Gram's dog? But KSL is truly attractive. I was at first thought there must be something wrong with this company and it will stay cheap. But I change my opinion after reading their annual report. It's a very easy to read annual report and you get the feeling these folks are down to earth. At the end of page 90, I agree 100% this this company is truly under-valued. Under-valued unjustifiably!

Look at the list of major shareholders, institutional funds like Lembaga Tabung Haji, Public Mutual, Templeton, JP Morgan, etc have been building their positions quite nicely as at 7 May 2010.

With the owners still holding substantial stakes and a group respectable shareholders, buying into this company this will make us feel a lot better.

Two main reasons of why I like this company:-

(1) Big margin of safety. They have 2,100 acres of land. If we value the land-bank just at RM 16 per sq feet, landbank worth 1.5 billion or 4.40/share.

(2) The company management has a very clear idea how they want to develop the landbank. See below table.

At 1.38, this stock is selling for less than 2 times forward PE? Assuming they take another 3 - 5 years to realize that RM 700 mln revenue, at the same depressed 5 times earning multiple, it will push the share price to RM 3.70. Entry at RM 1.38 and exit at RM 3.7 in 5 years time will give us annual compounded return of 22%. In the meantime, they will pay us a net dividend yield of 2.7% every year.

Disclosure: No position(yet).


Kent Chang said...

hi turtle may i knw where u get the project schedule of Johor projects?
i mean the table above

Turtleinvestor said...

Data constructed from annual report