Keppel Land - Reward for shareholders beckons (KE)

Event

? Keppel Land’s 3Q11 PATMI came in at $58m, 6.6% higher than a year ago, which we think is largely in line with consensus estimates. PATMI for 9M11 contracted by 25.1% YoY to $191.8m, but we expect earnings to be back-loaded. Upon the successful divestment of Ocean Financial Centre (OFC) to K-REIT, KepLand is likely to reward shareholders with a bumper dividend and recycle the rest of its capital into new investments. Maintain BUY.

Our View

? Due to the irregularity of overseas project completions, net profit from property trading fell by 42.3% YoY to $116.5m for 9M11. However, we expect some back-loading of earnings, as phases of its projects in China, such as The Botanica in Chengdu, Central Park City in Wuxi and The Springdale in Shanghai, are scheduled to be completed in 4Q11.

? More important, the demand for KepLand’s township homes continues to be healthy. In particular, the group sold nearly 1,200 homes in China in 9M11, of which about 780 were sold in 3Q11 alone. The best-selling project is The Botanica Phase 6 with about 450 units sold in the quarter. To-date, KepLand has achieved sales of RMB1.05b from 119,200 sq m.

? KepLand recently announced that it will be monetising its 87.5% stake in OFC to K-REIT at a valuation of $2b, or $2,600 psf, backed by a five-year rental guarantee of up to $170m, subject to the approval of minority shareholders/unitholders. Upon completion of the deal, expected to be no later than year-end, KepLand will book in a net gain of $492.7m (33 cents per share). With that, its shareholders can perhaps look forward to a bumper special dividend of around 17 cents per share.

Action & Recommendation

With the divestment of OFC, KepLand has cut its direct exposure to the Singapore office market from 25% to 12% as a percentage of gross asset value. This potentially reduces some overhang on its share price. In addition, it is in the perfect financial position to recycle its capital should the opportunities arise. Maintain BUY with a target price of $3.55, pegged at a 30% discount to RNAV. We also forecast a total dividend of 29 cents per share, which translates to an enticing 10.6% dividend yield.