Keppel Land

OCBC on 9 Mar 2012


Since we last reiterated BUY on Keppel Land on 20 Jan (FV: S$3.32), the share price has appreciated 31.1% (STI +5.6%). We see this driven by three catalysts: 1) a large 20 S-cents dividend (announced 19 Jan) which eliminated the discount on the corresponding cash component of RNAV - now riskless and to be paid out, 2) increasing expectations of policy loosening in China, and 3) stronger than expected Jan 12 residential sales in Singapore. Currently, we feel it is too early to call a bottom for the domestic office sector and also remain cautious on the residential space. These risks are balanced out, however, by 1) potential RNAV accretion given ample capital (10% net gearing) and 2) continued expectations for policy loosening in China. This being so, we see the shares as fairly priced and downgrade to HOLD with an unchanged fair value estimate of S$3.32 (35% discount to RNAV).

Up 31% since reiterating BUY rating
Since we last reiterated BUY on 20 Jan (FV: S$3.32), the share price has appreciated 31.1% (STI 5.6%). We see this driven by three catalysts: 1) a large 20 S-cents dividend (announced 19 Jan) which eliminated the discount on the corresponding cash component of RNAV - now riskless and to be paid out, 2) increasing expectations of policy loosening in China, and 3) stronger than expected Jan12 residential sales in Singapore. Moreover, KPLD was a value laggard – as of end FY11, KPLD was trading at 55% discount to RNAV versus CAPL’s 40% and CDL’s 31% – which we believe was attractive to investors looking for a value buffer in the market rally.

Office bottom not in sight yet
Given macroeconomic uncertainties and an ample office pipeline of 4.2m sqft NLA in FY12-13, we believe it is too early to call a bottom for the domestic office sector, a major driver for KPLD’s share price. Over 2H11, we saw office rents peak as Grade A rents declined 0.5% QoQ in 4Q11 while Grade B rents fell by 0.4%. We see persistent downside risks for the share price should headline rentals and capital values continue to decline.

Remain cautious for residential segment
We also remain cautious on the residential sector and note that luxury and mid-tier segment sales had been subdued YTD. The bulk of KPLD’s unsold exposure is outside the mass market, except for The Luxurie (368/622 units unsold), and there is limited upside in terms of development sales ahead, in our view.

Downgrade to HOLD
However, we see these headwinds mostly balanced out by 1) potential RNAV accretion given ample capital (10% net gearing) and 2) continued expectations for policy loosening in China. This being so, we judge the shares as fairly priced and downgrade to HOLD with an unchanged fair value estimate of S$3.32 (35% discount to RNAV). 

Keppel Land

Kim Eng on 7 Mar 2012

More catching up to do. Keppel Land has been an outperformer year-to-date, but over a longer one-year period, it is still down by 20.7%, trailing behind its big-cap peers CapitaLand and City Developments Limited (-12.5% and -3.1%, respectively). We believe that KepLand has repositioned itself to tide through any near-term uncertainties and reaffirm our Buy recommendation on this relative laggard.

Beijing project a bigger deal than initially thought. In January, KepLand said that it had acquired a 51% stake in a prime commercial project in Beijing’s Chaoyang CBD, with an estimated breakeven of RMB20,000 psm GFA. After reviewing our earlier forecasts, we raise our capital value assumption for the office component to RMB50,000 psm, which suggests a RNAV accretion of 8 cents per share from the project instead of the original estimate of 4 cents per share.

Biding its time in Sengkang. KepLand has withheld the launch of the remaining 322 units at The Luxurie in Sengkang. We reckon that management could be waiting for the adjoining site to be made available on the Confirmed List in April and make a bid for it. If successful, KepLand can dictate the near-term supply and pricing in the vicinity. If not, then the winning bid is likely to result in a project with a higher breakeven than that of The Luxurie, mitigating its own risks.

Keeping the good stuff. Despite the slow turnover in the high-end residential market, KepLand has no intention of reducing asking prices just to move inventory. A prime example is Reflections at Keppel Bay, which received its Temporary Occupation Permit at the end of last year. KepLand has decided to retain about 130 of the 290 unsold units for corporate residences with a view to selling them only when the market picks up, just as it had done for 168 units at the Caribbean previously.

Laggard backed by bumper dividend. We have raised our target price to $4.00, pegged at a narrower 30% discount to RNAV due to KepLand’s better-than-ever balance sheet. The group has proposed a bumper dividend of 20 cents per share, subject to approval at the AGM scheduled for 20 April. Buy now, for a potential total return of 27%.

Singapore Property Sector

Kim Eng on 26 Jan 2012

Mass market exuberance still reigns


Few signs of demand letting up. Merely a month after the introduction of the Additional Buyer’s Stamp Duty (ABSD), anecdotal evidence suggests that the sense of caution experienced following the implementation was just temporary as both homebuyers and property developers appear to be resuming their activities. In our opinion, such a phenomenon may not last and we remain neutral on the Singaporebased developers, preferring the diversified property plays instead.

Developers still vying for land. From the three residential Government Land Sales tenders that closed after the introduction of the ABSD, it appears that developers are still looking to acquire welllocated sites. While the Mt. Vernon Road tender suggests that developers are pricing in a potential drop in property prices, the two most recent tenders for the sites at Clementi Ave 6 and Simon Road still attracted healthy interest of 8 and 12 bids respectively. We also noted that foreign developers continue to be actively bidding for land, perhaps less daunted by the medium-term uncertainty.

Emboldened by recent launches. Recent launches of mass market projects and Executive Condominiums (ECs) continue to see healthy demand despite growing concerns over the economy. For example, Far East Organization’s The Hillier at Hillview (~$1,200 psf) and Watertown at Punggol Central (~$1,100 psf) have both attracted strong demand. In the near-term, demand for attractive suburban projects may continue to be supported by the benign interest rate environment and our economists are not expecting interest rates to hike up markedly before 2H13. This may have encouraged some developers to continue to acquire sites to meet upgraders’ demand.

Risky bet against time. The developers with mass market projects on their hands may be facing a race against time to launch their recently acquired projects. We estimate that from the sites that have been sold under the GLS which have yet to be launched, the potential supply that may come onto the market over the next 12 months stands at 12,248 condominium units and 2,495 EC units, and counting. Developers could find it harder to find suitable windows of opportunity to launch projects.

ASPs and sales volume set to fall. Faced with a more daunting income/employment outlook due to economic concerns and ample housing options, we believe that upgraders will inadvertently adopt greater caution when reality bites, potentially by mid-2012. That may then lead to the precipitation of mass market prices of up to 20% by end-2013. We also expect primary market sales to be reduced to
11,000 units p.a. for 2012 and 2013.

Remain neutral on Singapore-centric names. Despite our expectations of lower ASPs and sales volume, we remain neutral on the stocks with significant exposure to the Singapore residential market as the downside risks have been priced in. Maintain HOLD on City Developments Limited (TP:$9.38), Wing Tai (TP:$0.97), SC Global (TP:$1.05) and Ho Bee (TP:$1.01), while we prefer the more diversified players like CapitaLand (TP:$3.21) and Keppel Land (TP:$3.30).

Keppel Land

DMG & PARTNERS on Jan 25 2012

OFC booster to muted FY11 results: Keppel Land announced FY11 results with a huge booster of one-time gains totalling $1.086 billion mainly from the divestment of Ocean Financial Centre (OFC) and its attributed revaluation surplus, as well as partly from Marina Bay Financial Centre (MBFC) Phase 2 and K-Reit. The results are slightly ahead of expectations, with net profit excluding exceptional gains of $279.7 million at minus 0.6 per cent y-o-y slightly above our expectation of $253.3 million. We have a 'buy' recommendation on Keppel Land, TP of $3.53.

Bumper dividend slightly above expectations: We previously highlighted the possibility of a special dividend for FY11 post-divestment of OFC should capital deployment opportunities remain protracted. Along with FY11 results, total dividend of 20 cents per share (ex-dividend April 26; 7.8 per cent yield) has been proposed which is slightly ahead of our expectations of 18 cents per share.

Near-term focus on commercial segment, Beijing acquisition announced: Post-divestment of OFC, the current balance sheet is healthy at about 0.1x gearing. We gather takeaways from management comments along with the FY11 results and believe KepLand's near-term focus for capital deployment lies in the commercial segment given policy overhang in both Singapore and China markets.

Along with FY11 results, KepLand announced the acquisition of a 51 per cent stake in a Beijing commercial site (2.6ha, GFA 100,000 sq m; completion end-2014) which is expected to be developed into three office blocks and retail premises in the Chaoyang district. This may allay some possible market concerns on uncertainty regarding KepLand's currently evolving business model.

Maintain 'buy', TP $3.53: We reduce TP to $3.53 after factoring in a lower consensus TP for K-Reit, partly mitigated by higher asset under management for its fund management arm Alpha Investment Partners with first closing of Alpha Asia Macro Trends Fund (AAMTF) II. Maintain 'buy' on account of

steep discount of 50 per cent to RNAV;

bumper dividend which may provide support to share price in the near term, and

any potential of China policy overhang abating in H2 FY12.
BUY

Keppel Land

OCBC Research on 20 Jan 2012

As anticipated, Keppel Land (KPLD) announced a rich dividend of S$0.20 (7.8% yield on yesterday’s closing price) which would likely be a positive catalyst for the share price in the near term. FY11 PATMI of S$1,366m increased 29.7% YoY mainly due to OFC divestment gains and fair value gains on investment properties. Adjusting for one-time items, we estimate core PATMI at S$279.6m, which was 6% higher than our full year forecast. Maintain BUY with a higher fair value estimate of S$3.32 (35% RNAV discount) versus S$3.21 previously, mainly due to higher prices for K-REIT holdings and realized fair value gains. Including a cash dividend of S$0.20 (book closing - 26 Apr 12), this implies a total 12m return of 37%. 

FY11 results within expectations
As anticipated, Keppel Land (KPLD) announced a rich dividend of S$0.20 (7.8% yield on yesterday’s closing price) which would likely be a positive catalyst for the share price in the near term. FY11 PATMI of S$1,366m (S$0.93 EPS) increased 29.7% YoY mainly due to a S$508m gain from the OFC divestment and S$550m of fair value gains on investment properties. Adjusting for one-time items, we estimate core PATMI at S$279.6m, which was 6% higher than our full year forecast of S$262.6m. Top-line of S$949.0m was 3% lower than our S$977.0m forecast.

Residential segment to face more headwinds
KPLD sold 480 homes in FY11, versus 650 in FY10, with a total sales value of S$729m. In China, we observed a similar slowdown in residential sales in FY11 as KPLD sold ~1,400 units – significantly lower than the 4,100 units sold in FY10. We believe governmental curbs in these two main markets have had significant impact on sales and we expect to see a continued slowdown in the pace of sales over 1H12 at least.

Acquired new commercial site in Beijing
Management also announced yesterday that it had paid S$168m for a 51% stake in a commercial site in Beijing’s CBD between the eastern second and third ring roads. It has a GFA of ~100k sqm and is planned for a development with three office block and retail premises. Management has indicated that they expect rental yields to be ~6-7%, which we feel is realistic. However, given the purchase price, we are fairly neutral about the acquisition and assign no accretion to RNAV at this juncture.

Maintain BUY 
Maintain BUY with a higher fair value estimate of S$3.32 (35% RNAV discount) versus S$3.21 previously, mainly due to higher prices for K-REIT holdings and realized fair value gains. Including a cash dividend of S$0.20 (book closing - 26 Apr 12), this implies a total 12m return of 37%.

Keppel Land

Kim Eng on 20 Jan 2012

Bumper gains from OFC divestment. KepLand reported a record FY11 PATMI of $1.37b, thanks to the divestment of Ocean Financial Centre to K-REIT at the end of FY11. Excluding $591.3m of fair value gains, underlying PATMI was in line with expectations. While no special dividend was announced, KepLand is proposing a bumper final dividend of 20 cts/sh, giving an attractive yield of 7.8%. Maintain BUY.


Expecting soft residential markets. Property trading accounted for nearly 71% of the underlying net profit of $279.7m (excluding OFC divestment). In Singapore, KepLand sold about 480 homes worth $729m in FY11. In China, the Group sold over 1,400 homes worth RMB1.24b with a GFA of 144,200 sqm. Management conceded that both markets could remain soft in 2012. The Group will watch the Chinese market closely for potentially some policy easing in 2H12, and could launch up to 6,652 units this year.


Acquiring 51% stake in prime Beijing property. KepLand also announced that it is acquiring a 51% stake in a project company which will develop a prime commercial property in the heart of Beijing's CBD in Chaoyang district. The project will comprise office and retail with a total GFA of 100,000 sqm. At an estimated all-in cost of RMB2b, or RMB20,000 psm GFA, we estimate a potential 4 ct/sh RNAV accretion assuming the project will eventually be sold at RMB32,000 psm.


Further acquisitions will be selective. Despite having a cash position of $1.9b as of end-2011, KepLand will be selective in making new acquisitions. Potential areas for investment include commercial sites in certain parts of China, retail malls in Vietnam and Indonesia. Myanmar could also present opportunities and the Group already has a presence there via two Sedona hotels.


Entering 2012 in a position of strength. We have trimmed our target price to $3.30 pegged at a 40%-discount to RNAV in view of the economic outlook. KepLand's strong balance sheet provides it with the potential to make more RNAV accretive acquisitions. Maintain BUY.