Keppel Land: Surging ahead of fundamentals

Still early to call for a turnaround, in our view. While the property transaction data for April showed a gradual return of buyers towards the high-end property segment, we reckon that a majority of this demand was directed towards projects with small size units which fetched low absolute prices and also projects in which developers had re-launched at lower prices. We believe that the turnaround for high-end property developers such as KepLand has yet to come as buying sentiment still remains fragile in the high-end segment and buyers remain sensitive to pricing, which will limit the ability of developers to raise selling prices.

Extension of payment served as reminder of lingering default risk. Earlier in May, KepLand said it had extended the payment due date to an enbloc buyer of 51 units in The Suites at Central by 6 months, while receiving a monthly payment of S$0.5m during the extension period. While we reckon that buyer is committed to complete the purchase, we do see significant risk, given the large quantum of the outstanding payment (estimated: ~S$94m). Despite the recent improvement in sentiment, this incident served as a reminder of the potential default risk that developers are likely to continue to face. If the buyer fails to complete the transaction, KepLand will be able to keep the 20% downpayment, which would effectively lower the breakeven price of the units to S$1,445 psf. However, given that the last transacted for the project was around S$1,500 psf in April, the margin of safety is little and write-down may be needed for the returned units if prices continue to fall over the next 6 months. Nevertheless, impact on our valuation will not be significant as the estimated total attributable profit from this project is ~2.6% of our RNAV estimate.

Downgrading to SELL. Since we upgraded our recommendation on KepLand to BUY on 27th April, KepLand's share price had risen by 40.7%. Although the recent Rights issue had removed funding overhang and boosted KepLand's balance sheet, we believe that the recent optimism had been overdone, given our view that a turnaround for high-end developers and the recovery of the office market will still take some time. We prefer to stay conservative with our fundamental view and maintain our 50% discount to development profits and property valuations. As such, we are keeping our fair value unchanged at S$1.61, and downgrading KepLand from BUY to SELL.

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