Keppel Land: Awaited asset injection a net positive (DMG)

(BUY, S$2.72, TP S$4.91)

Injects OFC into K-REIT. KepLand announced the divestment of its 87.5% stake in OFC (999- yr lease, 850 yrs lease remaining; 884,957 sf NLA) into K-REIT, priced at $2,013m translating to 2,600 psf NLA. The transaction entails income support of $170m for a period of 5 years, as well as a call option which effectively allows KepLand to retain its residual interest at the end of the 99-yr lease. KepLand has committed to take-up pro-rata entitlement of K-REIT's proposed 17- for-20 rights issue (Kepland holds a 46.4% stake) at $0.85. Excluding its gain attributed to stake in K-REIT, net gain on book value amounts to c.$492.7m.

A net positive for KepLand, reflects cautious mood. The income support is expected to fill in the gap on fitting out periods, as well as lower rates that were pre-committed during the recovery phase for the recently completed OFC with avg rents c.$9 psf. Stripping out the income support from the transacted price assuming full utilization, we derive $2,380 psf, still positive in our view versus $2,159 psf embedded in our RNAV for KepLand. We believe this swift transaction prestabilization of OFC reflects KepLand’s cautious stance on the office sector.

Uncertainty of business model, special dividend? i) Gearing falls to 3% from 37.6% post transaction reflecting a strong balance sheet, which we believe raises the possibility of special dividend if capital deployment opportunities remain protracted ii) We previously raised the potential market concern of the uncertainty revolving around KepLand’s business model with this potential transaction which materialized, transforming KepLand towards a pure play China/Singapore developer currently experiencing headwinds in both markets which leaves KepLand with remaining 19% of RNAV to office exposure.

Maintain Buy, TP$4.91. We factor in the one-time gains to FY11 earnings, as well as OFC divestment to K-REIT and consequent increase in AUM to RNAV. TP is raised to $4.91 based on 20% discount. Maintain BUY on deep value.