Thursday, May 14, 2009

KepLand - Sell by CIMB (13 May 09)

Funding overhang resolved; asset quality should return to focus. KepLand has undertaken a 9-for-10 renounceable rights issue at S$1.09 each to raise S$712m. Its shares have started to trade ex-rights, on 12 May. We believe the capital injection will be beneficial in meeting its funding needs. Development capex should now be adequately taken care of, with FY09 net gearing falling from 0.52x to 0.26x. We believe investors will now focus on KepLand’s land-bank quality, mainly located in prime locations and acquired at low levels before the upcycle.

But valuations are not compelling after a sudden surge in share price. KepLand’s share price has been re-rated by more than 100% from its low of Mar 09, and now appears to fully capture prevailing physical-market residential prices and office rents. With both office and residential supply expected to become more pronounced in 2010, we believe accumulating the stock at this level offers a poor risk-reward proposition. Over 35% of KepLand’s RNAV rests in risky office assets, based on our estimates.

Post-rights adjustments. We lower our FY09-11 core EPS estimates by 42-47% to incorporate dilution from the rights issue. We lower our post-rights CY09 RNAV estimate from S$2.64 to S$2.40 on an enlarged share base, offset by lower commercial cap rates of 6% (6.5% previously) and higher marked-to-market valuations for KREIT.

Maintain Underperform. We raise our target price from S$1.32 (50% discount to RNAV) to S$1.80, now pegged to a 25% discount to RNAV to reflect its mid-cycle valuation discount since its funding overhang has been resolved. Maintain Underperform. We look to be buyers of the stock below our target

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