Keppel Land - Sell: Office Glut, Limited Exposure to Residential

Current price reflects office capital value bottoming at S$1,500psf — Based on our estimates, to justify the current share price, prime grade A office capital values need to be valued at S$1,500psf. With the recent transactions of Anson House and Parakou Building at S$1,100psf and S$1,280psf respectively, it might be fair to assume prime grade A office at S$1,500psf currently. We are not convinced this is the bottom as we have not seen the worst of supply yet.

Sell on valuation — The stock has almost tripled from its low in March and was up over 50% and outperformed the market by almost 30% in the past month. In our view, the stock was grossly oversold but with the recent strong rebound, we think the stock is no longer undervalued and is slightly ahead of its fundamentals.

No green shoots insight — We remain cautious on the office sector outlook. With no new demand and plenty of subleases available as well as new supply amounting to approximately 2.4m sqft per annum in 2010-12, we maintain our view that prime grade A office rental will head towards the S$5psf level. Unlike residential, there has been no pick-up in the demand for officespace.

Exposure to residential limited — Apart from Reflection at Keppel Bay, Madison Residences and Marina Bay Suites, Keppel Land does not have any major projects in the pipeline. We have raised our RNAV to S$2.43 (from S$2.25) and target to S$1.94 (from S$1.80) to reflect higher residential prices and higher office capital values.

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