Keppel Land: 2Q11 performance within expectations (OCBC)

2Q11 PATMI of S$50.5m. Keppel Land (KPLD) announced 2Q11 PATMI of S$50.5m, which was 64.9% lower than the restated 2Q10 earnings. Similarly, sales came in at S$104.2m, down 67.2% YoY. These results came in broadly in line with our expectations as 1H11 PATMI now constitute 53.4% of our FY11 forecast, which we keep mostly intact. As guided previously, earnings were made more "lumpy" by the adoption of INT FRS 115 in FY11. Under the new accounting standards, profits on overseas projects and sales under DPS are now recognized only on full completion. Management indicated that, if INT FRS 115 had not been implemented, 1H11 PATMI would be 23% higher than that of 1H10 (S$153m).

Sengkang site to launch in 2H11. KPLD is poised to launch the residential site at Sengkang in 2H11, which we think would sell reasonably well given its location and still healthy OCR sales (794 units sold in Jun11, 74% takeup rate). In 2Q11, KPLD sold ~75 units in Singapore mostly at the Lakefront Residences, about the same pace in 1Q11 (85 units). 2Q11 Chinese home sales remained stagnant at ~250 units versus ~150 units in 1Q11. This is largely within expectations and likely an inevitable outcome given current curbs in China. Management expressed that they will be maintaining price levels. We think this is credible given KPLD's relatively stout balance sheet (0.38 net gearing, S$931m cash). Going forward, we expect Chinese sales to remain subdued, and possible opportunities to come in the form of accretive acquisitions from smaller distressed players as Chinese monetary conditions tighten further.

OFC phase 1 at 82.6% occupancy. OFC phase 1 obtained its TOP in Apr11 and is currently 82.6% occupied, which is only marginally higher than that in end 1Q11 (82.3%). Management guided that sentiments had softened somewhat in 2Q but we are not worried given its already decent occupancy rate and believe management were likely looking for higher rental levels. OFC phase 2 is expected to complete in 2H12. MBFC phase 2 is currently 60% pre-committed.

Maintain BUY at S$4.65 fair value. We updated assumptions and increased the valuations of OFC and MBFC Phase 2 in our model to reflect the rising cap values of prime grade A office buildings. As such, our RNAV estimate increased to S$5.17 per share from S$5.09 previously. Given the further softening of the residential sectors in China and Singapore, we also built in a mid-cycle discount of 10% to RNAV to derive a fair value estimate of S$4.65, which implies a 28% upside from the current share price. Maintain BUY.