Keppel Land Limited: Right asset mix spurred record year

- In line; maintain Outperform. FY10 core net profit of S$296m forms 105% of our FY10 estimate. We believe this is in line with consensus as well. Highlights were divestment gains from MBFC PH 1 and strong overseas development sales. Both could be features in 2011-12 as well. The focus on prime commercial assets and entry-level residential projects in China is a positive. We raise our FY11-12 core EPS by 12-15% on recognition changes and introduce FY13 numbers. Our target price, still based on RNAV, rises marginally by 1% to S$5.91 on a higher target price for KREIT. Further evidence of higher rents and overseas sales could provide catalysts. At 23% discount to RNAV, KepLand remains our top pick for the sector

- Expect more trading from its prime office portfolio. Headline earnings soared 273% yoy to S$1.05bn, aided by a S$364m net gain from the divestment of MBFC Phase 1 to KREIT. Trading gains from commercial assets could become recurring in 2011-12 with the expected completions of OFC and MBFC 2 respectively. Pre-commitments for OFC have risen from 63% to 80%, and could be next in the pipeline. We believe spot rents are now S$10-12psf, indicating capital values of S$2,600-2,800psf at a 4% cap rate. KepLand also has the option to retain KTGE Towers as a commercial asset if sentiment in the residential segment remains weak.

- Focus on affordable housing. Development profits continued to be powered by overseas projects, particularly China. Over 4k low-mid-end units in China had been sold in 2010. Despite tightening, these entry-level townships continue to generate good demand. Management will be rolling out more such units in 2011, targeting first-time buyers in the low-mid-income bracket. Pricing remains non-speculative at Rmb5k-11k psm, with signs of gradual appreciation. We continue to believe that this segment is relatively insulated from policy risks in China. We estimate that over 70% of KepLand's China portfolio (28% of GAV) comes from this segment. In Singapore, over 62-74% of its launches (Reflections, MBS and Lakefront Resi) have been sold.

- Room for further NAV growth. Management is comfortable with a gearing of up to 0.5-0.6x from the current 0.2x. Large-scale mixed developments in Singapore will be of particular interest to the group. Villa developments in Vietnam and townships in China are also on its radar.

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