Thursday, January 22, 2009

Keppel Land Buy Call by Kim Eng(price target $2.79)

KepLand posted an FY08 net profit of $227.7m, a 70.8% decline from $779.7m in FY07. Removing one-off gains, core earnings fell 23.6% yoy to $213.3m, meeting our expectations. Revenue however fell by 40.2% in FY08, largely due to the completion of several development projects in Singapore and overseas. As expected, no write-downs were made. The Group’s management had reviewed its residential landbank and concluded that no provisions or write-downs are necessary due to their low breakeven prices, in relation to market prices. In addition, its investment properties including those under K-REIT have also held their values, with no downward revision in capital values yet. Assurance given with regards to funding for MBFC and OFC. Construction works are underway for both the MBFC and OFC. Management has given the assurance that there is sufficient cash to fund the construction of both projects. In addition, management also reiterated that future tenants are contractually-bound, and must stay true to the committed rental levels even if market rates have dipped. Timeline for new residential launches look uncertain. Due to the weak market conditions, KepLand will delay project launches in Singapore and overseas. In Singapore, this will include units at Reflections at Keppel Bay and Marina Bay Suites. This follows weak sales of only 52 units sold in 2H08, made up of units at Reflections, Park Infinia and The Tresor. Management will also keep a keen eye on project costs, possibly suspending projects that do not add value. Negatives have been priced in. We think that despite the weak outlook, especially pertaining to the weak demand for mid-to-high end residential and office sector, these negatives have already been priced in. KepLand’s balance sheet remains strong enough to weather the storm. We maintain our BUY recommendation with a target price of $2.79, based on a 50% discount to RNAV.

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