Keppel Land Ltd: 9-for-10 Rights issue at S$1.09 gives stronger balance sheet

9-for-10 Rights issue at S$1.09. Last Friday, Keppel Land (KepLand) announced that it will be raising gross proceeds of ~S$712.3m through a renounceable 9-for-10 Rights issue. Up to 653.5m new KepLand shares will be issued at a subscription price of S$1.09 per Rights shares. Based on the closing price of S$1.88 on 23rd April, the subscription price of S$1.09 is at a discount of 42% to its closing price and 27.6% to the theoretical ex- rights price of S$1.50. Upon the completion of the Rights issue, KepLand's net debt/equity ratio will decline from 0.52x to 0.22x and NTA per share will decrease from S$3.50 per share to S$2.35 per share.

Strong support from parent KepCorp. As a demonstration of support, Keppel Corporation (KepCorp), which holds ~52.64% of KepLand, has undertaken that it will subscribe for its entitlement in full. For the balance Rights shares, they will be fully underwritten by Merrill Lynch, of which 90% is being sub-underwritten by KepCorp. Total cash commitment from KepCorp will be between S$373m (subscription of entitled Rights shares) to S$678m (full subscription of entitled Rights shares and commitment shares).

Rights issue not within our expectation. In our earlier report, we had expected fund raising concerns to ease as KepLand still had cash holding of S$627m and adequate funding sources (MTN Progamme: S$909m and Bank facilities: S$925m) at the end of 1Q09. Even though we have not anticipated this fund raising exercise from KepLand, we are viewing this exercise positively. The rationale for undertaking the Rights issue is to further strengthen KepLand's balance sheet and to pursue strategic opportunities in core markets. Approximately 80%-100% of the net proceeds will be used for development expenditure, capital management and to pursue strategic acquisition opportunities. We believe that the fund raising exercise could also prepare KepLand for its potential involvement in new projects like Tianjin Eco-City.

Raising our fair value on strengthened balance sheet; Upgrade to BUY. In light of its lower balance sheet risk after the Rights issue, we are now lowering our discount on KepLand's investment and development properties to 50% (previously 60%). As outlook for the developers remains uncertain, we believe that developers with stronger balance sheets will continue to be favored by investors and KepLand now deserves a re-rating. Our fair value of KepLand has now been raised to S$2.07 (previously S$1.76) and our ex-Rights fair value will be S$1.61. We are now upgrading KepLand from HOLD to BUY.

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