Singapore Land FY2008 Results - BUY (Kim Eng)

Previous Day Closing price: $3.22
Recommendation: BUY (maintained)
Target price: $4.44 (reduced from $4.57)

SingLand recorded a loss of $117.4m in FY08, compared to a staggering net profit of $1.36 bn the previous year. However, the bottomline volatility is largely caused by fair value revaluations of its investment properties. On a core earnings basis, net profit actually rose by 15% yoy to $158.5m due to higher rental and hotel income.

Operationally, SingLand enjoyed a 24% yoy increment in its gross rental income. Gross revenue from Pan Pacific Hotel also improved by 47% to $117.4m. We expect SingLand to continue to benefit from positive rental reversions from its office properties, but the negative impact of the economic downturn is likely to hit its hotel earnings.

SingLand’s portfolio of investment properties experienced a 6.3% overall decline in fair value as compared to June 08. Flagship SingLand Tower suffered a 10% decline in its valuation, but Marina Bayfront suffered a steep 25% drop in value, possibly due to Merrill Lynch shifting some of its operations to its new building at Harbourfront. Capital values are likely to decline further, and we expect more fair value losses going forward.

UOL has made a conditional cash offer for UIC, which owns 72.4% of SingLand. Should the offer be unconditional when UOL receives a 50% acceptance for UIC shares, UOL will then make a mandatory conditional cash offer of $3.57 per SingLand share, by virtue of the chain principle. The offer price is at a steep 60% discount to our FY09 RNAV.

We believe that the shareprice has already over-compensated for further fair value losses on its investment properties. We also believe that UOL’s bid for UIC is in part motivated by the value they see in SingLand, which forms a substantial part of UIC’s NAV. We maintain our BUY recommendation, with a target price of $4.44 at a 50% discount to RNAV.