Keppel Land - Remain bearish on office segment

After soaring 2.4x from its March low, KPLD is now priced at a mere 8% discount to our revised RNAV estimates of SGD2.37. The estimates reflect: 1) higher residential home prices of 10-20% compared to our earlier assumptions; 2) lower construction costs of 20-25%; 3) higher fair valuations for its listed associates and subsidiaries; and 4) rolling over to 2010 as our base year. We kept our BUY call when the market slumped in March and think it is time to take profit following the rally. Our SGD1.90 TP is pegged at a 20% discount (unchanged) to our RNAV estimates.

At current levels, the recent resurgence in optimism over the revival of the office and residential sub-sectors is more than priced in, in our view. Residential homes account for 26% of our RNAV estimates. KPLD is currently trading at par with its book value of SGD2.35 (post-rights). Historically, KPLD has never traded above 1.0x P/BV during the economic downturns, i.e. Asian Financial Crisis, Internet bubble and SARS outbreak.

While interest in the office sub-sector appears to have returned somewhat (eg, the VTB Building sold at SGD1,061 psf, Parakou Building at SGD1,280 psf and Anson House at SGD1,100 psf), we remain sceptical. Office demand is likely to remain weak as the financial services sector consolidates following an influx of new supply. A case in point: the leasing pre-commitment for KPLD’s Marina Bay Financial Centre (MBFC) has remained unchanged (61%) for more than a year. The office sub-sector accounts for 19% of our RNAV estimates.

Despite the REDUCE call, KPLD still has good fundamentals, with lower risk of landbank impairment and asset write-downs than many of its peers. Its balance sheet has strengthened following the recent rights issue, with its net debt/equity ratio improving to 0.2x from 0.5x. At this point, however, its valuation is far too rich.

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