Keppel Land's roadblocks in 2012

Deflated demand will cripple one of its residentiial segments, and put pressure on prices and office rentals.

Its stock price also has little chance of beating expectations as a bevy of negative factors like government cooling measures take their toll, says PhillipCapital in a report card after Keppel Land posted an impressive S$1.37 billion net profit in 2011.

While this year promises downside risks, Keppel Land can turn them to its advantage through bargain acquisitions and strategic development of properties in China and Myanmar.

Still, the foreseen impediments were enough to shift the stock recommendation to Hold from Buy.

Here's more from PhillipCapital:

Going forward, we expect the sale progress continue to be slow in 2012, especially for the high-end residential segment. Nonetheless, earnings will still be underpinned by the several overseas projects completions and progressive recognition from projects in Singapore in FY12.

In just 3 months after the Ocean Financial Centre divestment, Keppel Land announced that it has acquired 51% interest into a 2.6-ha commercial site located in CBD of Chaoyang district, Beijing, at the cost of about S$193.6mn. The site has been planned to build 3 office blocks and retail premises, with total GFA of about 100,000sm to be completed in 2014. Management guided that initial yield is in between 6 to 7%.

With the political scene in Myanmar turning positive, the management indicates that it is actively exploring opportunities for property development in the country. The market is not totally new to Keppel Land as it has already owned 2 established hotels there – Sedona Hotel Yangon and Mandalay.

We had in the last quarter gave Keppel Land a Buy call in anticipation of its good FY11 earnings and potential special dividends, however, the stock was hit when the government announce a new set of cooling measures on 7 Dec 2011, before rebounding in the last week. Given the unfavorable market sentiments with residential price and office rental are under pressure, we see little catalysts for the stock to outperform in the near term.

We do note that it is in good position for opportunistic acquisitions in market down cycle, given its low gearing of 10.4%. We roll over our RNAV estimate to FY12 at $5.08 per share, but ascribing a steeper discount of 45% (previously 35%) to reflect the increased downsides of residential price and office rental. Fair value is thus lowered from $3.20 to $2.79. We downgrade our recommendation from Buy to Hold. Upside risks include the government of China and Singapore easing on cooling measures on the residential property markets.

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