Keppel Land (KimEng)

Event

Keppel Land’s share price has fallen by 41.5% since the beginning of August on the back of its sizeable portfolio of Singapore office properties, as well as the difficult residential markets in Vietnam and China. Nevertheless, we believe KepLand is in a better financial position now compared with 2009, and valuations remain attractive. Maintain BUY.

Our View

Even though we have been sounding caution on the Singapore office sector, KepLand’s office exposure has been largely mitigated by high commitment rates. The recently opened Ocean Financial Centre (OFC) is about 80% leased out while MBFC Ph2 is already about 60% pre‐committed one year ahead of completion. We reiterate our belief that International Grade A developments are likely to outperform older Grade A and B developments in the coming cyclical office downturn, both in terms of rents and capital values. We currently value OFC and MBFC at $2,400 psf.

In August, KepLand launched The Luxurie in Sengkang and sold more than 82% of the 220 units launched at an ASP of about $980 psf – in line with our overall assumption of $1,000 psf. While we maintain that the mass market residential segment is likely to see a price correction of up to 10% by end‐2012, KepLand’s reduced inventory of unsold mass market units mitigates its downside risks.

Overseas, conditions for the residential markets in Vietnam and China remain challenging. Despite continued policy risks in China, the demand for reasonably priced township projects persists, as seen by the healthy take‐up during the launch of Phase 6 of The Botanica in Chengdu. However, we are less positive on the Vietnam market in the medium term, with most developers withholding new launches until sentiment improves.

Action & Recommendation

KepLand is in a better financial position now with a net gearing of 0.38x, compared to 0.52x in 2009 before it did a rights issue. Despite the economic headwinds, we believe that valuations are attractive, even as we lower our target price to $3.00, pegged at a wider discount of 40% to RNAV. The potential monetisation of OFC in FY12 could be a positive catalyst. Maintain BUY.