Keppel Land Limited – 2Q11 Results (POEMS)

Hold (Maintained)

Closing Price S$3.63

Target Price S$4.18 (+15.2%)

Lower 2Q11 results due to absence of physical project completion in overseas residential developments

Decent sales achieved in most residential markets

Good results from fund management segment with segmental net profit increased 52% y-y in 1H11

Ocean Financial Centre is expected to contribute maiden income and revaluation gain by end-FY11

Maintain Hold with fair value lowered to $4.18, China residential market remains key concern

2Q11 Results

Keppel Land reported its 2Q11 revenue of $104.2 mil and PATMI of $50.52mil, decreased 67.2% and 64.9% y-y respectively. The decrease in turnover was due to absence of revenue recognition from overseas residential projects which construction works are still on going. However, higher revenues were reported by Singapore projects, primarily the new revenue stream from The Lakefront Residences which was launched in Nov 2010, and Madison Residences as a result of higher percentage of physical completion achieved. At the net profit level, apart from lower contribution from overseas due to absence of physical completion, the investment properties also contributed lower rental yields, which were partly offset by increased in contribution from K-Reit Asia and Alpha Investment Partners.

Property trading – decent sales overall

Property sales in Singapore remained slow for Keppel Land’s high-end residential properties, while remaining units in The Lakefront Residences continued to be offloaded. As of end June 2011, the project was 93% sold since maiden launch in Nov 2010. That drives property sales in 1H11 to 160 units, compared to 140 units for the same period last year. Encouraging sales momentum was achieved in China despite the continuous efforts in curbing property price by the government. Strong sales were achieved in Indonesia project, Jakarta Garden City, with approximately 100 units sold in 2Q11.

Keppel Land will roll out its 622-unit residential project in Sengkang towards the end of this year. We expect the project to receive decent demand due to its close proximity to MRT station (estimated ASP $1,000psf), bearing in mind there will be intense competition in the mass market segment due to more upcoming residential launches in 2H11.

Property investment

Rental incomes were lower due largely to lower revenues from Ocean Towers in Singapore and Saigon Centre in Ho Chi Minh City, partly cushioned by higher rental income from Equity Plaza in Singapore. At the net profit level, the lower rental incomes were partly offset by higher contribution from K-Reit Asia. Going forward, new income stream from Ocean Financial Centre (OFC) is expected in 2H11 as it has been completed in 2Q11 and is currently 82.3% committed.

Fund management

Fees from fund management for 1H11 grew 52% to $23.9mil due to higher acquisition and management fees reported by K-REIT Asia Management and Alpha Investment Partners. The net profit is accounted for 18% of Keppel Land’s net profit and is the best half-year performance from its fund management vehicles over the past five corresponding periods.

Earnings forecasts

Revenue for the remaining of FY11 to be underpinned by revenue recognitions according to project completions in China, as well as new income stream from OFC. We also expect Keppel Land to book a substantial revaluation gain from OFC in FY11, but we have not included it in our estimate at this juncture.

Chinese property price regained strength in June despite government’s measures Property price in 70 cities in China seems regained strength in June 2011. On y-y basis, new residential prices decreased in 3 cities, while growth rate moderated in 28 cities. In comparison, new residential property prices in May decreased in 3 cities and growth rate moderated in 36 cities. Most of the cities experienced growth rate slowdown in January to May, but quicken in June.

Pace of increase in residential floor space sold in 40-city accelerated from 9.9% in May to 16.2% y-y in June. Generally, signs are suggesting that the impact of property measures implemented earlier is fading, that raise again the possibility of more measures to be introduced by the government. The China’s cabinet said last week that it will expand measures to curb excessive price increase in tier-2 and 3 cities, which currently only implemented in the teir-1 cities. While appropriate measures will help to promote stable and sustainable property price, we believe policy risk will continue to weigh on share price of Keppel Land for 2H11. The management also expressed interest in gaining exposure into China’s commercial property market to diversify risk in the long term.

Maintain Hold with fair value lowered to $4.18

We keep our RNAV unchanged at $4.92. However, given that China government will not loosen its tightening policy in the property market any time soon, we apply a 15% discount (previously 0%) to its RNAV to reflect the continuous uncertainty over the China residential market. Consequently, fair value is lowered from $4.92 to $4.18. We maintain our Hold recommendation on Keppel Land as we believe the potential upsides from its exposure in Singapore office sector have been reflected in the current share price, which is at 1.22x forward P/B.