Keppel Land - Limited earnings impact on Madison Residences delay

Construction of Madison Residences deferred. Earlier in mid-March, Keppel Land announced the deferment of the construction of Madison Residences (MR), a 56-unit residential development along Bukit Timah Road. The project was launched in September 2008 and only 1 unit was sold at ~S$1,740 psf. In light of the deferment, the Sale & Purchase agreement has since been terminated by mutual agreement. KSH Holdings, which was awarded the construction contract worth S$53m (~S$478 psf ppr) for Madison Residences, has also agreed to the deferment of the construction.

Construction deferment a rational move. Holding cost for this Bukit Timah land is low as it was acquired in 1999 and the estimated current book value of the Bukit Timah land plot is ~S$45.3m or ~S$409 psf ppr (after write-down in 2001). Demand for high-end projects is unlikely to return in the near future and if the construction for MR proceeds, KepLand may have to carry the 55 unsold units on its balance sheet. Taking into consideration the capital outlay for the construction, holding cost for the completed project will be significantly higher upon the completion of the project.

Limited impact to our earnings forecast. In light of the deferment of the project, we are now removing the revenue and earnings contributions of MR from our FY09 and FY10 forecasts. As the scale of MR is relatively smaller than the rest of KepLand's ongoing development projects, the impact of the delay on KepLand's earnings is limited. We are cutting our FY09 and FY10 PATMI estimates by 3.6% and 7.7% to S$241.4m and S$296.2m, respectively.

Risk factors priced in; Maintain BUY. Our FY09 RNAV estimate has been lowered marginally to S$3.67 (previously S$3.68) and based on yesterday's closing price of S$1.41, KepLand is trading at a hefty discount of 61.6% to our RNAV estimate. Risk for KepLand is relatively higher than its peers, given its higher RNAV exposure to the office sector in Singapore and limited scale of diversification in its operations. However, we believe that the bulk of the risk has already been priced in as KepLand is trading at a significant RNAV discount relative to peers' average discount of 35.2%. We maintain our fair value of S$1.77 on KepLand and despite the strong recovery in share price since hitting a low of S$0.985 in mid-March, we still see an upside potential of 25.5% for KepLand. We maintain our BUY rating on KepLand.

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