Keppel Land: Expecting bumper divestment gains (OCBC)

Divesting 99-year interest in OFC at S$2,600 psf. Keppel Land (KPLD) announced it would divest to K-REIT its 87.5% stake in Ocean Properties Pte Ltd (OPPL), which holds Ocean Financial Center (OFC) - a 999-year leasehold building. For this transaction, OFC is valued at S$2.01b or S$2,600 psf. Net of OPPL's liabilities, K-REIT would pay KPLD S$1.57b for the stake. Note that K-REIT only has a 99-year interest in the OPPL stake and KPLD has an option to buy back the stake for S$1 at the end of the period. In addition, K-REIT would enjoy rental support of up to S$170m until end 2016.

Market likely to view this as positive for KPLD. We believe that the market would view this transaction, which would result in a net gain of S$493m, as a positive development for KPLD. Note that this is subject to approval from K-REIT unit-holders on 10 Nov 2011and that major unitholders KPLD, KCL would be abstaining on the resolution re. the acquisition. Since OFC is currently only 80% committed at average rentals of S$9 psf, this divestment likely came somewhat earlier than expected. The price of S$2,600 psf also came nearer the high end of our estimates, exceeding other 99-year investment transactions year to date, particularly S$2,524 psf for One Finlayson Green in earlier in Mar when the office sector outlook was rosier. However, the effective price for OFC could be as low as S$2,380, depending on how much of the S$170m rental support package K-REIT would draw upon.

Fortified balance sheet and flexibility for capital deployment ahead. Through this transaction, KPLD's net debt to equity ratio would fall from 37.6% to a merely 3% which would fortify KPLD's balance sheet and give management increased flexibility for capital deployment. Given that management continues to see strong long-term prospects in Singapore and China, we believe there could be compelling opportunities for distressed assets should macro conditions deteriorate further.

Further details of transactions. The cash proceeds for this transaction to KPLD are expected to be S$1.57b. K-REIT is likely to finance this by S$602.6m debt and the remaining by equity, and would propose a 17-for- 20 rights issue at S$0.85 per unit to raise S$976.3m. KPLD would then take up its pro-rata entitlement which is S$456.5m, resulting in a net cash inflow of S$1,115m.

Maintain BUY. Pending the approval of the acquisition by K-REIT, we maintain BUY on KPLD with an unchanged value estimate of S$3.97 (20% discount to RNAV).