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Here’s Why Better Days Are Not Ahead For Keppel Land Ltd

For the whole of yesterday, and stretching into the time of writing today (9:40 am), real estate outfit Keppel Land Ltd (SGX: K17) has had its shares halted from trading.

Daily national broadside The Straits Times had reported on the rumours of a possible privatization of Keppel Land yesterday after the trading halt was announced. My colleague Chong Ser Jing had looked into the privatization issue and highlighted some important points for Keppel Land’s investors to note; you can find out more here.

Besides halting the trading of its shares, Keppel Land also postponed the planned briefings for its fourth-quarter earnings release. Although, the firm did still announce its financial results as planned yesterday evening. Let’s dig into the company’s earnings announcement.

A financial overview

For the whole of 2014, Keppel Land saw a 2.5% year-on-year increase in revenue to S$1.497 billion. Meanwhile, the firm’s pre-tax profit before fair value gains had climbed by 9.5% to S$733.1 million.

Although a rise in profit is always welcome, investors should note that a large part of Keppel Land’s pre-tax profit before fair value gains had come from the gains that arose from the sale of its stakes in Marina Bay Financial Centre Tower 3 and Equity Plaza. Keppel Land had netted roughly S$186.5 million in gains from the sale of the stakes in the two properties.

Due to a much lower fair value gain on its investment properties in 2014 as compared to 2013, Keppel Land actually saw its earnings per share (EPS) fall by 15% from S$0.573 to S$0.487.

The good news though, is that there’s a large influx of cash to the company due to the divestment of many of its properties in 2014 (besides MBFC Tower 3 and Equity Plaza, Keppel Land had also sold its stakes in properties located in Indonesia and India).

Keppel Land has been using the cash to aggressively reduce its debt, in the process lessening the financial risks it faces. To that point, Keppel Land’s net-debt (total borrowings net of all cash) has fallen from S$2.9 billion at the end of 2013 to S$1.6 billion at the end of 2014; the firm’s net debt to equity ratio has also fallen from 38% to only 20% as a result.

The future

Based on management’s discussion of its prospects for 2015 given in the earnings release, my main take-away is that the company’s not very optimistic about its business for the current year (2015).

Property cooling measures that were enacted in both China and Singapore (Keppel Land’s two main geographical markets) are still weighing on their respective residential real estate markets. But, there are signs of improvement in China given that the government has started relaxing its Home Purchase Restrictions. In Singapore, the trends don’t look good for the market with new home sales having halved in 2014 and prices declining by 4% in that year.

These present tough challenges for Keppel Land. But, the company believes that its well-located projects should be able to provide some ballast from unfavourable market conditions.

Moving on to commercial real estate, Keppel Land is still seeing good rental growth in Grade A office rents in Singapore (a 14.9% jump in 2014). In China, the company sees office rents in Beijing and Shanghai being supported by healthy demand and other forces. These are encouraging signs for the company.

As for the company’s other geographical markets, Keppel Land would be focusing on growing its businesses in Indonesia and Vietnam as it sees growing demand in both countries in the future.

Foolish Summary

Going forward, Keppel Land would focus more on expanding its overseas presence in the commercial real estate space. In addition, the firm will invest in and grow its fund management businesses, which currently only accounts for 0.5% of its total assets.

Management would also manage its property development business more opportunistically by trying to time launches to match market-recovery trends. But, that might be easier said than done.

When we take everything into account, things are not looking too great for the company at the moment.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any company mentioned.