BUY S$2.69 STI : 2,724.69
Price Target : 12-month S$ 4.18
Reason for Report : Company update
Potential Catalyst: Divestment of assets
DBSV vs Consensus: Above
• Recycling $1.57bn of proceeds through sale of OFC
• Attributable net gain of S$492.7m
• Maintain Buy, S$4.18 TP
Divests OFC on a 99-year basis. Keppel Land is proposing to divest its 87.5% stake in Ocean Financial Centre (OFC) on a 99-year interest to KReit for S$2.013bn or S$2600psf, inclusive of up to S$170m of income support till end 2016, implying a 4.25% cap rate. This is within valuers’ valuations of S$2.01-2.054bn. The deal will allow Kepland to lighten its balance sheet while enabling Kreit to upgrade its portfolio to become the largest landlord in the prime Raffles Place/MBFC area. Kepland has a call option to acquire its stake in OFC back at the end of 99 years at a price of S$1. OFC is a 4th generation building sitting on the same site and is currently 80% committed with blue chip tenants such as ANZ, BNP Paribas and Drew & Napier. The office tower obtained TOP in Apr 2011. The deal is subject to minority and unitholders’ approval at an EGM on Nov 10th.
Net gain of S$492.7m. The selling price is within our expectations. Kepland is expected to receive cash proceeds of S$1571.3m after taking into account S$441.8m of adjustments for net liabilities for construction of the carpark and retail podium. Netting off S$456.5m for subscription for its pro-rata 46.4% stake in Kreit’s fund raising exercise, the group would recognize an attributtable net gain of S$492.7m. As a result, balance sheet will be strengthened with net gearing declining to a low of c3% (based on June 2011 numbers) while ROE should rise to an estimated 18% on the back of the capital recycling. This will provide the group with significant capacity for reinvestment into commercial and residential projects in both Singapore and overseas, including China. YTD, Kepland had spent S$900m to purchase 3 sites in Singapore and China.
Maintain Buy. We have yet to revise our FY11 earnings to reflect the OFC divestment gain. Including the $492.7m gain, net profit for FY11 could reach $858m for the year. The group is well placed to reinvest its gains and this should bode well for future reflation in RNAV from any reinvestment exercise. The stock is currently trading at a steep 52% discount to its RNAV of S$5.57 and we expect this monetization exercise to narrow this gap closer to our target price of S$4.18, based on a 25% discount to RNAV. Maintain Buy.
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