Keppel Land - Privatisation of Evergro for longer-term accretion

Keppel Land (KPLD) announced a proposal to privatise 85.4%-owned China property developer Evergro Properties (EVGP SP, S$0.295, Not rated). KPLD is offering S$0.29/share in cash or 1,000 shares for every 7,000 EVGP shares it does not already own. The cash offer represents a 16% premium to the most recent close before the announcement, and the share offer represents a 21.1% premium. The privatisation involves a cash consideration of S$54mn if all EVGP’s minority shareholders were to opt for cash. We believe KPLD has the resources to fund the exercise, having raised some S$700mn in netproceeds from the recent rights issue. An independent financial advisor will be appointed by the board of EVGP and an EGM will be convened to seek shareholder approval for the privatisation. Given that KPLD, with its majority interest, is not prevented from voting inthe EGM, we do not expect much objection on the proposal. We think the entire privatisation exercise could be completed by year-end.

As a recap, KPLD was first involved with EVGP (then known as Dragon Land) in 2001 when it bought a 24.9% stake in the company. The rationale then was to use EVGP as the platform for KPLD’s drive into the second tier cities in China. Besides 61.4%-owned Stamford City Phase 1 (150 units) in Jiangyin, Serenity Cove Phase 1 (83 villas; completed in 2008) in Tianjin and Summer Ville (566 units; completed in 2008) in Changzhou, which were launched and sold, EVGP currently still has 23.1mn sq ft of attributable site area (mostly in Tianjin) that is undeveloped.

Over the years, KPLD has built up its own capabilities in China’s second tier cities, as shown by its recent developments such as the township project in Shenyang, The Botanica in Chengdu and The Central Park City in Wuxi, which makes a separate listed platform such as EVGP somewhat redundant.

The cash offer price of S$0.29/share is equivalent to 1.7x EVGP’s end-1Q09 book value of S$0.17/share, but represents a 28% discount to our estimated NAV of S$0.40/share for the company. Our NAV estimate is derived assuming a land value of RMB800psm of site area in Tianjin and AV of RMB2,000psm of GFA for the remaining phases of Stamford City in Jiangyin. EVGP’s landbank in Tianjin is part of a development on two islands in the Yin Cheng Lake of Hangu District. As a reference, based on information from The Tianjin Municipal Bureau of Land Resources and Housing Management, there were two mixed development sites in Hangu District that were sold for RMB808-846psm of site area in April this year.

Considering EVGP’s small market cap (S$317.4mn pre-announcement) and the illiquidity of the stock (average daily trading volume of just 130,000 shares over the last 12 months), we think the offer price’s discount of 28% to our estimated NAV is probably fair. On the other hand, the discount offers KPLD the potential to unlock value in the longer term by monetising EVGP’s landbank in China.

We are keeping our earnings forecasts unchanged pending the completion of the privatisation, which is likely to be at the end of this year. We have also excluded the impact of the acquisition of the remaining 14.6% in EVGP from our NAV calculation for now. Still, we have raised our valuation for EVGP from S$0.17/share (the then market value, which also coincides with the company’s end-1Q09 book value), to S$0.295/share, the current market value, in our NAV calculation for KPLD. Consequently, we raise KPLD’s NAV from S$2.11/share to S$2.23/share (+5.7%). Consistent with our previous valuation methodology, we apply a mid-cycle discount of13% to KPLD’s ex-listed entities (and rights proceeds) NAV to arrive at our revised price target of S$2.07/share, from S$1.95/share previously (+6.2%).

The stock is down nearly 20% since early June, versus a 5.4% fall in the FSSTI. Based on our revised price target, which suggests much of the downside is now reflected in the price, we upgrade our rating from Reduce to NEUTRAL.

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