Keppel Land - Earnings Risk in 2H09

KepLand reported 1H09 operating and net earnings, in-line with our expectations. In our view, it is the 2H09 earnings that are likely to disappoint, potentially from write-downs in the residential and commercial landbank and largely from losses from revaluation of commercial assets, a process which will likely be undertaken only in December. Given the current 23% downside risk to our price target of S$1.95, we maintain our Underweight rating on Keppel Land.

Stronger balance sheet post rights issue, with net debt/equity ratio as at Jun-09 at 0.23 times and according to the company, it intends to capitalize on opportunities, seeking acquisitions in Singapore and overseas. Strong 2Q09 residential sales, notably in China, Singapore and Vietnam with 1,345, 42 and 28 units sold respectively.

Asset revaluation losses or write-downs in landbank yet to be reported; hence, downside risk to earnings remains in our view. Singapore office outlook remains weak. Pre-commitments for its MBFC office development has stagnated at 61% since 3Q08, with nosubstantial commitments yet at Ocean Financial Centre. We expect the decline in office rents to continue from the current committed prime grade A office rents at S$9.50/sq ft, to S$8.40/sq ft and S$6.50/sq ft for 2009and 2010 respectively. According to data by JLL, of the 7.75mn sq ft of new office space entering the market in 2009-2012, only 26.5% of the space has been committed.

Price target at premium to CY09 NAV of S$1.80, attempts to capture the improvement in liquidity in the equity market, in which investors may be willing to pay a premium above intrinsic value. As Keppel Land is highly skewed to the Singapore office market (53% of its NAV), which we are most bearish on, we find its valuations uncompelling, particularly given that the only bright spot for the sector is the residential markets of Singapore and China which comprises 8% and 18% of its NAV respectively. The stock is trading at a 10% premium to our bull case NAV of S$2.31, which we believe is unjustified.

Sponsored Links

Keppel Land - Keeping the faith

Upgrade to BUY at S$2.98. Post-rights, KepLand’s balance sheet strength ranks among the sector’s best, with net gearing of 0.22x and S$1.3b cash. This would enable KepLand to expand residential landbank in Singapore and China, as well as addressing concerns over office capex for MBFC and OFC. With 27% RNAV exposure to China and Vietnam, we believe KepLand is wellpositioned to ride on a recovering property sector within these emerging economies. KepLand trades at 0.95x P/B during the initial phases of property recovery cycles. We thus peg our new target price for the stock at parity to our new base case RNAV of S$2.98. Upgrade to BUY at S$2.98.

Ample arsenal of cash to pump up residential landbank. KepLand’s present rich cash coffers and low leverage should enable it to snap up new plots of land with ease. We surmise acquisitions should evolve around Singapore and China, where KepLand has been relatively quiet the last two years. With already 4.7m sqm in GFA across nine projects, Vietnam’s potential pipeline should be more than sufficient.

Interest in Chinese and Singapore mid-prime projects beckons. In Singapore, we understand that management remains focused on mid-prime residential developments, preferably of a mid-large scale. With a return of interest in mid-prime properties in the offing, we expect KepLand to benefit from an expedited re-launch of Madison Residences, Marina Bay Suites and Reflections. We also view KepLand’s residential exposure to China’s upperlower tier cities (17% of RNAV) positively, where favourable government policies and an improved credit environment have boosted volumes and sentiments.

Low impairment risk. Provisions of KepLand’s residential landbank appear unlikely, given that a substantial portion of its Chinese and Singapore residential assets were bought at low costs prior to the 2007 upcycle. Further, its Vietnamese joint partners will bear any land bank risks. Breakeven costs for its MBFC and OFC sites are also relatively low, while conservative valuations in FY08 imply low asset devaluation risks for its office portfolio.

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.

KepLand - Property sales still the main source of income

KepLand netted a 1Q09 PATMI of $36.9m, representing a 38.8%-yoy decline and a 40%-qoq decline, in line with our expectations. This is mainly due to lower contribution from property trading. Singapore accounted for 74.5% of PATMI. Its revenue also fell by 46.6% yoy and 26.1% qoq. No writedown to its landbank has been made this quarter.

Attributable profit from property trading amounted to $31.7m, accounting for 86% of 1Q09 PATMI, despite falling 35.3% yoy, 16.1% qoq. KepLand continues to recognise profits from Singapore projects such as The Sixth Avenue Residences, and the 15 new units sold at The Tresor (~$1,300 psf) and Park Infinia (~$1,200 psf) each. It also saw higher associated earnings from Marina Bay Residences and Reflections at Keppel Bay. Its remaining landbank of 900,000 sq ft in GFA predominantly caters to the high-end segment.

Other contributions to PATMI include $9.6m from property investment and $4.6m from fund management. While together they provide a more regular income stream than property trading, their contributions may weaken in the subsequent periods as spot rents for office properties continue to slide and with a prolonged recession, occupancy rates will also be negatively impacted.

Aside from its current cash position of $626m, KepLand has unutilised credit facilities of $1.8b in place, giving it access to $2.4b in cash if necessary. The management does not expect net gearing to exceed 1x over the next two years from the current 0.5x. While KepLand may face some challenges monetising its assets in this current environment, we believe its balance sheet is strong enough to weather the tough markets. A rights-issue currently looks unlikely.

KepLand is unlikely to sell many residential projects in Singapore for the rest of the year, but China has recently shown signs of a possible recovery and KepLand will benefit from it, along with possible a recovery in Vietnam. Keeping our forecasts unchanged, we are maintaining our BUY recommendation at a target price of $2.62, pegged to a 50%-discount to its RNAV, and a 25%-discount to its book value of $3.50.

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.

Keppel Land Rights Timetable

Please note these important dates for the Keppel Land Rights issue.

Keppel Land Rights Issue Indicative Timetable

Last day of Cum-Rights Trading: 11 May 2009

First Day of Ex-Rights trading for Rights Issue : 12 May 2009

Books Closure Date: 14 May 2009

Commencement of nil-paid Rights Trading: 19 May 2009

Last Day of nil-paid Rights trading: 27 May 2009

Last day & time (i) for acceptance & payment for Rights shares and (ii) for application & payment of excess Rights: 2 June 2009 at 5pm (at 9.30pm for Electronic applications)

Last date and time for renunciation & payment for Rights Shares: 2 June 2009, 5pm

Expected date of issue of Rights shares: On or around 11 June 2009

Expected date of commencement of trading of Rights shares on SGX: On or around 12 June 2009

Keppel Land announces rights issue to raise S$712.3m

Keppel Land has announced a renounceable 9-for-10 rights issue to raise approximately S$712.3m as part of its long term strategy to maintain an optimal capital structure. Up to 653,462,397 new ordinary shares will be offered at the issue price of S$1.09 per Rights Share. As at 31 March 2009, the net debt-to-equity ratio of the Group was 0.52 and the NTA per Share was S$3.50. After adjusting for the estimated net proceeds of the Rights Issue and the issuance of up to 653,462,397 Rights Shares, the proforma net debt-to-equity ratio of the Group is expected to improve from 0.52 to 0.22 and the NTA per Share is expected to decrease to S$2.35.

The Rights Shares are priced attractively at an Issue Price of S$1.09 that represents a discount of:

(a) 42.0% to the closing price on 23 April 2009 (being the last trading day prior to the date of this announcement) of S$1.88 per Share;

(b) 27.6% to the theoretical ex-rights trading price ("TERP") of S$1.50 per Share

(c) 53.7% to the Company's post-Rights Issue net tangible assets ("NTA") of S$2.35 per Share

KepLand - Buy: Trading at Deep Discount

1Q results — Keppel Land reported 1Q net income of $36.9m, about 15% of our estimates and 20% of consensus. Revenue of $145.7m came in ahead of our estimates while operating profit was in-line, but associate income of $29.3m was lower than expected.

Property trading main driver — Attributable profit for the property trading segment fell 35% yoy due to completion of several projects last year – namely The Seasons in China, Villa Riviera in Vietnam and Park Infinia at Wee Nam in Singapore. Despite the fall, property trading was still the main driver of net income, contributing some 86%. Both property investment and fund management segments managed improvements both on a yoy and qoq basis.

Income from associates — Recognition of profit from Marina Bay Residences and Reflections led to the higher profits from associates. Keppel Land guided that it had recognized $15.6m for the fully sold Marina Bay Residences (48.4% completed) but only $3.7m for the 55%-sold Reflections(22.6% completed) in 1Q09 alone. We expect progressive contribution from both projects over the next 9 months.

Maintain Buy (1L), TP $2.23 — While we remain negative on the office sector, we see value in Keppel Land. The stock is trading at a 44% discount to our 09E RNAV of $3.19 and 1.5 standard deviations from its mean on a 6-month forward basis. Even during the 2003-2004 period when both residential and office sectors were depressed, the stock reverted back to its mean valuation of a 16% discount. Maintain Buy.

Keppel Land - Downside risk to office rents and capital values

Potential capital raising: Given the funding requirements of Keppel Land’s ongoing developments, we believe that the company will need to come back to the market for equity. We estimate that the group will require S$1bn to strengthen its existing balance sheet and fund current investments.

Downside risk to office rents and capital values: Given the expectation of demand contraction and massive supply slated to come onstream, we now expect rentals to decline faster than previously expected and forecast Grade- A office rents to fall to S$8 psf pm, S$5 psf pm and S$4 psf pm in 2009, 2010 and 2011 respectively. On the back of falling forward rentals, we are forecasting capital values to fall to S$1,200psf in 2009 and S$800psf in 2010. In particular, Keppel Land’s key office assets will be completed when supply risk is close to or at its peak.

Deferral of projects: Keppel Land has announced that it will be deferring the construction of Madison Residences. At the full year results management has guided that it was reviewing all current and planned development projects with the intention to delay those which no longer add value under current market conditions.

Office market recovers: If both rents and capital values for the office sector remain strong, Keppel Land would benefit the most, given its extensive exposure to Singapore office sector.

Economic recovery and revival of the property market: If economic conditions improve, the health of the property market is expected to get better too.

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.