Keppel Investment Report

Introduction to Keppel Land

Company Profile

Founded in 1890, Keppel Land Limited is the property arm of the Keppel Group, one of

Singapores largest multinational groups with key businesses in offshore and marine,

infrastructure as well as property with its sterling portfolio of award-winning residential

developments and investment-grade commercial properties.

Keppels development consists of Marina Bay Financial Centre, Ocean Financial Centre and

One Raffles Quay and current focus is development in Singapore, China, Vietnam, Indonesia

and India.

Dealing with property development and property fund management (K-REIT Asia, a pan-Asian

and Alpha). Keppel Lands has a total assets value of about $9.5 billion as at 31 December

2011. Keppel Land is a component of both the Dow Jones Sustainability Asia Pacific and World

Indices.

Keppel Land goals will focus on becoming the premier developer of real estate, having

constructed world-class iconic waterfront homes at Keppel Bay and Marina Bay in Singapore.

History

Keppel Corporation was corporatized in 1968 (as Keppel Shipyard (Pte) Ltd). In the 1970s and

80s, the company launched its diversification program. Keppels first overseas venture took

place in 1975 when Keppel Philippines Shipyard was set up in partnership with Filipino

investors, and three years later, Keppel began Shin Loong Credit (renamed Shin Loong

Finance) financial services to provide factoring to marine contractors.

Keppel ventured into property development in 1983 when it acquired Straits Steamship

Company, which had substantial land holdings in Singapore. In 1989, the company was

renamed Straits Steamship Land and was eventually renamed Keppel Land to reflect the

property focus.

In 1990, they acquired Asia Commercial Bank, thereby establishing a pillar of banking and

financial services for the company. In 2001, Keppel Shipyard was amalgamated with Keppel

FELS and Keppel Singmarine becoming the Keppel Offshore & Marine group in 2002.

Sales Revenue

Keppel Land enjoyed a 70.3% Year on Year growth in its first quarter 12 (after tax profit) of

$141.9m, from profits arising from the project Reflections at Keppel Bay. Singapore accounted

for 77.2% of Keppel Lands profits, due to development profits recognized from Reflections and

Marina Bay Suites.

Industry Analysis

Overview of Property Industry

The property industry of Singapore has seen a robust improvement since the 2008 - 2009 GFC

saga and despite the ongoing Euro zone sovereign debt crisis. This can be attributed to

Singapores strong and sustained economic recovery, with a GDP growth forecast of 3-5%

despite the turbulence in the external environment.

Residential Property market

This improvement is reflected by the surge in residential property prices by 38% from its lowest

2009 2Q. This shows that the residential property market is growing despite such a backdrop in

the global economy.

Source: URA & CapitaLand Research

Even though this surge in property prices is positive, coupled with inflation, has raised concerns

of housing bubble again. The Singapore government implemented a number of cooling

measures to dampen the investment demand and speculative buying. The government has

taken a two way pronged strategy by 1) increasing the land supply and 2) imposing market

controls. This is done by lower the loan-to-value (LTV) ratios on second mortgages, increasing

the Sellers Stamp Duty and more taxes on residential property transactions were introduced.

These measures seemed to be effective as there was a slower growth in price rises. New

launches and sales also fell by 8.7%. In addition, short-term speculation; indicated by the

volume of sub-sale transactions, have slowed down considerably. In addition, there is a drop in

proportion of residential properties bought by foreigners and companies from 20% in 2011 to

7% in H1 of 2012.

Retail property market

Retail rents are expected to remain flat despite positive consumer sentiments and robust tourist

arrivals into Singapore. This may be due to rising business costs and the competitive retail

environment.

One of the factors to raise business costs is the risk of oil hike and inflation due to the ongoing

uncertainties in the Middle East among others. However, such concerns can be eased by

positive retail sales due to high tourist arrivals. Since the launch of the integrated resorts, visitor

arrivals have totaled to 11.6 million in 2011. The high volume of visitors translates to better retail

sales.

Office Property market

The office property sector started off with fluttering sales but a less than luster looking leasing

market. The subdued leasing market was due to the Eurozone debt crisis and the slow growth

in the Chinese and Japanese economies. The imposition of some cooling measures such as the

Additional Buyers Stamp caused investors to look for alternative asset options such as the

strata-titled office units.

However, sectors such as mining and gas, equity investment and private banking remained

positive and also contribute to the office take-up. Although rental rates may slide further due to

growing supplies and the uncertain global economy, the decrease is capped at 15%.

Industrial property market

Although business costs are rising and the global economy is uncertain, manufacturing sector

actually grew by 13.1%. This growth is supported by new plant operations in the chemicals

sector and inventory building activities in the biomedical sector in tandem with stronger global

demand outlook. Factory spaces rents also increased by 3.9% and capital values increase by

4.7% while industrial rents and capital values are expected to be stable. Amidst limited supply

and optimistic investor sentiments towards the economy, demand for single-user factory space,

warehouse and business parks are expected to improve further.

Overview of GuocoLand

GuocoLand is a diversified property development company that has expanded their portfolio to

include integrated developments in Singapore, China, Malaysia and Vietnam. These projects,

which are a mix of both development and investment projects, are their core earnings and which

will be lease out as a base for recurrent income. Bulk of the business is still concentrated in

Singapore with major projects such as a site above the Tanjong Pagar MRT station, Goodwood

Residence and Sophia Residence. Overseas, GuocoLand has 2 integrated projects in Shanghai

and in Beijing as well as a residential development in Tianjin.

GuocoLand has also been awarded the Building and Construction Authority (BCA) Green Mark

for its green efforts in various projects.

GuocoLands profits for the year was mainly from the Goodwood Residence and Sophia

Residence projects while overseas sales such as in China was slow due to the cooling

measures taken to dampen the overheated property market.

The above chart shows GuocoLand price trading its highest at $5.80 on 1 October 2007 and

lowest at $0.98 on 2 March 2009. Upon further comparison with Keppel Land, Keppel Land

seems to be doing better with a higher ROE of 32.9% while GuocoLand only at 5.17%. This

shows that Keppel Land is able to generate more profit then GuocoLand using investments

made by shareholders.

GoucoLand ROE refer to appendix for calc

Comparison of Annual Share Price Performance

The chart above compares the historical share price performances of both Keppel Land and

GuocoLand for a five-year period.

During the five year period, Keppel Land was trading its highest at $8.35 on 2 July 2007 and

reached its lowest at $1.30 on 2 February 2009 while GuocoLand reached its highest at $5.80

on 1 October 2007 and lowest at $0.98 on 2 March 2009. As shown in the chart above, both

companies share price moves closely. This shows that they are positively correlated to each

other. Both companies share prices declined from 2008 onwards and reached its lowest in

2009. From then on, it starts to pick up again. This trend maybe due to the GFC making its way

into the Singapore economy. As the situation gets better over time, share price of both

companies starts to stablise slowly.

Porter's Five Forces Analysis

The five forces framework is used to make a qualitative evaluation of a firms strategic position.

They consist of five forces that are able to affect the company and its profitability.

Threat of new entry of new competitors

The threat of new entrants into the property market is low. This is due to high barriers of entries

such as high start-up capital requirements, difficulty in acquiring resources and legal issues. The

property market in Singapore is also limited as land is scarce in Singapore. Despite the fact that

the property market is allows companies to earn supernormal profits due to housing demands

and investments, these factors are sufficient to hinder new competitors from entering the industry

let alone establishing and operating without issues on surviving in the long run.

Keppel Land is an established and the largest local company in this industry listed in SGX

therefore if there are new entrants in the market, it will be difficult to compete with Keppel Land.

Threats of substitute of products and services

There are no threats of substitute products and services as the product; land is homogenous, and

the location that is being developed, will have only one developer in charge. Land is scarce in

Singapore so there can never be a substitute for the same plot of land by another developer. As

land is indispensable as having a place to stay is a basic necessity, even renting will need

consideration of the location and the creditability of the developer.

The bargaining power of buyers

Bargaining power refers to the ability of customers to exert substantial amount of buying power

to negotiate favorable price contracts. Customers do not have the ability to exert their buying

power to obtain an advantageous price for themselves as property prices are fixed. However, they

do have a choice of choosing the right property according to their price preferences.

For real estate development, location and design of the building is important to the buyer.

Therefore buyers will make decisions based on the accessibility of the location and the

developers designs if it is to their preference. They can look for others properties by other

developers if they are not satisfied.

The bargaining power of suppliers

Suppliers bargaining power is high as there are no local supply of resources due to Singapores

lack of natural resources. Keppel Land has no choice but to source for materials from other

countries. This can cause prices to increase as suppliers can easily increase their prices due to

high demand.

The intensity of competitive rivalry

Competition rivalry is evident and high in the property market. There are many competitive

property development companies in the market such as City Developments and Far East

Organization. These companies are well established and have a strong competitive edge in the

property market. Keppel Land can stay competitive by ensuring the buildings that they develop

are high in quality standard, complies with environmental requirements and are of exclusive

design and architecture to attract buyer.

SWOT Analysis

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. It is a strategic

planning method used to evaluate and align the companies resources and capabilities to the

requirements of the industry the company operates in. SWOT is used to evaluate the internal

potential and weaknesses and, the probable opportunities and threats from the external

environment. It allows both negative and positive factors that affect the company internally and

externally to be considered.

Strengths:

Keppel Lands strong financial position and low gearing positions it well to weather possible

economic uncertainties and capitalize opportunities in developing Asian countries. Keppel Land

net profits surpassed the $1 billion mark achieving $1.37 billion in 2011 despite the ensuing

Eurozone debt crisis and weak US economy.

Communication with investors and analysts is strong as they have good communication

practices and have been awarded for these efforts. The companys efforts have been

recognized booth locally and internationally. Keppel Land received the Silver Award for Best

Managed Board at the Singapore Corporate Awards 2011 for their efforts in transparency,

accountability, performance orientation and corporate governance.

In addition, Keppel Land has also been working towards Corporate Social Responsibility (CSR)

to demonstrate the companys focus in areas of environment, people and community. For the

second consecutive year, Keppel Land was selected to be part of the Dow Jones Sustainability

(DJSI) Asia Pacific Index which comprises of companies in the top 10% in terms of sustainability

leadership out of the largest 2, 500 companies listed Dow Jones Global Indices.

As a result, Keppel Land shareholders base has expanded in terms of both size and

geographical distribution.

Weaknesses:

Keppel Land was affected by the cooling measures by the government; selling just 480 homes

in 2011 despite some of its high-end residential projects like The Luxurie remained attractive.

This shows that Keppel Land was not able to buffer its core business against such measures by

the government.

Opportunities:

Having the ability to reach to the global property market, Keppel Land have many opportunities

to reach out to emerging Asian markets such as China, India, Vietnam, Philippines and many

more growing and economically stable Asian countries. Keppel Land saw the opportunity to tap

into the affluent and increasingly urbanized population in China by acquiring prime residential

sites in Shanghai and Wuxi.

By tapping into the global property market Keppel Land is re-shaping its growth strategies to

prepare for the new emerging market opportunities. This creates an opportunity for Keppel Land

to review its business strategies so that the Group can align its strategies to buffer against the

volatilities of the global economy.

Threats:

Constantly emerging and growing competitors serve a threat to Keppel Lands competitive

position. Companies such as GuocoLand, are constantly improving themselves and sharping

their competitive edge to stay competitive in the property industry.

Unstable global economy with the Eurozone debt issues, slowdown in recovery of US economy

as well as domestic inflation rates that are expected to continue to rise may put a slow to

property investments, construction as well as foreign investments in property. Domestic home

prices and food is expected to rise as well as governments continuous cooling measures to

dampen speculative buying may cause concerns amongst investors.

Financial Analysis

Recent Financial Performance

2011 2010 2 year average

EBIT/Sales 33.09% 22.70% 27.55%

Sales/Total Assets 15.61% 15.24% 15.43%

EBIT/Total Assets 5.16% 5.31% 5.24%

Interest Expense/Total Assets .57% .85% .71%

Net Before Tax/Total Assets 15.01% 16.70% 15.86%

EBIT/Sales (Operating Profit Margin)

The EBIT to Sales ratio or the Operating Profit Margin reveals the cost efficiency with which

daily business activities like organizations, procurement, production, sales and distribution

processes are done.

An analysis of Keppels EBIT/Sales figures reveals a growth of 10.39%, indicating an

improvement in gross profit margin or a reduction in costs due to better cost controls which is

the optimal situation for the company.

Sales/Total Assets (Total Asset Turnover)

The Total Assets Turnover ratio measures the use of total assets to generate revenue. This

ratio illustrates the sales strategy employed by firms to generate revenue. The higher total

assets turnover indicates better performance of the company, as it requires less investment to

generate higher sales revenue. Companies with high profit margins tend to have a low asset

turnover ratio and vice versa.

Keppel has maintained a very steady asset turnover, suggesting an already efficient business

model. The small increase of .37% is an indicator of good turnover on every dollar, in generating

sales. The fact that there is not much change in this figure implies that Keppel is already

operating with high efficiency (i.e. their investment in assets per dollar of sales remains

constant).

EBIT/Total Assets (Return on Asset)

The Return on Assets ratio (ROA) demonstrates the amount of profits that can be generated by

every dollar invested in assets. Capital-intensive industries will yield a low return on assets

because they have to acquire numerous, expensive machinery and equipment to set up.

However, companies operating in an industry requiring nominal capital such as advertising and

software have a relatively high ROA as they require minimal assets. As a general rule, values

below 5% are considered asset-intensive whereas anything above 20% is an asset-light

industry.

Keppel are a real estate and infrastructure developers and are in the capital-intensive industry.

However, an average stable return over two years of 5.24% suggests a good return on assets

(by industry standards).

Interest Expense/Total Assets (Interest Expense Rate)

This ratio tells us how much money a company borrows per dollar invested in assets. Initially, in

2010 this figure was .85% and it dropped to .57% as on year-end 2011. Even though this may

seem like a small change, in companies the size of Keppel Land that has infrastructural asset

backing, indicates an overt investment in assets without external borrowing. This is evident as

Keppel Lands interest expenses went up by only a few thousand in 2011, the year in which

their total assets increased by over two million dollars.

Net Before Tax/Total Assets

This ratio represents a companys ability to generate profit by utilizing the resources available. It

is similar to EBIT/ Total Assets except, opposing to the EBIT/Total Assets ratio. Keppel has

maintained a fairly stable ratio (16.7% in 2010 15.1% in 2011), indicating that Keppel has been

fairly efficient.

2011 2010 2 year average

Total Assets/Common Equity 112.17% 108.95% 110.56%

Net Earnings Before

Tax/Common Equity

16.84% 18.19% 17.51%

Tax Retention Rate 144.14% 133.41% 138.76%

Return in Equity (ROE) 25.20% 25.50% 25.35%

Total Assets/Common Equity (Financial Leverage Multiplier)

This ratio shows the extent to which common equity in the business has been leveraged in

order to acquire assets. It also shows the company's total assets per dollar value of

stockholders' equity. A high ratio represents greater leveraging of equity, consequently

indicating higher debt distress risk and vice versa.

As Keppel Land is in a capital intensive industry, these figures were considerable moderate,

ranging between 108% - 112%, is a fairly stable and low external debt.

Net Before Tax/Common Equity

This ratio illustrates how well a company is using its earnings before tax to generate more

earnings. It reflects upon efficient management decisions leading to solid investment

opportunities. This ratio mirrors the return to equity holders before tax.

Although Keppel Lands ratios have dropped from 18.19% to16.84%, this is not a reason for

concern as the drop is comprised of an increase in equity rather than a decrease in earnings.

Tax Retention Rate

This ratio is represented by the percentage of earnings held back/retained by a corporation, or 1

minus the dividend payout rate.

This percentage represents the proportion of net income before tax that is not paid in the form of

taxes. Thus, a higher ratio indicates a lower rate of tax paid.

Return on Equity (ROE)

Return on equity (ROE) is one of the most important indicators of a firms profitability and

potential growth by generating profit with the money shareholders have invested.

Keppel Lands ROE has been constant at about 25% for 2010 and 2011, indicating presence of

a stable management.

DuPont ROE Analysis

Importance of Return on Equity

ROE measures the net amount of income delivered as a percentage to the shareholders. It is a

strong measure of how well the management of a company creates value for its shareholders.

A favorable ROE indicates that the company will grow and generate high profit volumes. This

leads to high value and continued growth in the wealth for shareholders. ROE is widely used by

investors to determine how efficiently a company is making use of its monetary resources.

There are two ways of calculating ROE: the traditional approach and the DuPont formula. Under

the traditional formula, the companys net profit after taxes for the past 12 months is divided by

the shareholders equity.

However, as this approach fails to account for the impact of borrowed funds, the DuPont Analysis

formula was developed to link the use of debt to the outcome.

Uses of DuPont ROE Analysis

DuPont RoE analysis is a measurement of performance where assets are measured at their gross

book value rather than at net book value in order to produce a higher return on equity (ROE). It is

also known as the "DuPont identity".

Three factors affecting ROE:

1) Operating efficiency, measured by profit margin

2) Asset use efficiency, measured by total asset turnover

3) Financial leverage, measured by the equity multiplier

The extended DuPont model takes the three factors mentioned above and incorporates the effect

of taxes and interest based on the level of financial leverage. The system uses profit margins and

supports the effect of interest and taxes on the overall return to its shareholders. Hence, the

extended model initially utilizes EBIT rather than net income.

From a summation of the above statements we obtain the following equation:

ROE = [(operating profit margin) x (total asset turnover) - (interest expense rate)] x

(financial leverage multiplier) x (tax retention rate)

Valuation Assumptions

Risk Free Rate

We have assumed the 2011 government 10-year bond yield as the market proxy for the risk free

rate. The rate was 1.38%.

Beta

Beta measures the volatility or systematic risk, faced by a security with respect to the market. It

shows how sensitive a security is as it moves with the market benchmark. The straight line

derived from the statistical data is known as the security market line and the beta is the slope of

the line.

The regression is based on 60 monthly observations of monthly returns from July 2007 to June

2012. The beta derived for Keppel land is a value of 1.45. This means that Keppel land is more

volatile than the STI as a 1% changes in STI will result in 1.45% movement of price for Keppel

land stock.

Application of CAPM

Using CAPM, we have derived the value of required rate of return to be 17.25%.

E (R) = RFR + B (RM RFR)

Percentage growth in real GDP

Estimated

market return Probability

Expected market

return

very strong (>5%) 23% 35 0.0805

strong (2% to 5%) 18% 50 0.09

weak (-1% to 1%) 7% 10 0.007

very weak (

RR = Retention rate of earnings

ROE = Return on Equity

Assumptions

We expect the return of equity to grow with the overseas development projects. The growth rate

computed is 18.68%.

Valuation Analysis

DDM

The dividend discount model (DDM) is a financial model which is used to value the equity at the

discounted value of all future dividend payment.

We assumed the growth rate to be constant in the long term economy growth rate with all the

projects and investment they have oversea and in Singapore.

Keppel land which announced a total dividends of $0.20 per shares for 2011 which make up of

the company net profit.

We use the figures above and plug it into the constant growth dividend model. The intrinsic price

for Keppel land shares based on the constant growth DDM model is $4.09. This is higher than

the market price of $2.22 as of December 2011.

Sensitivity Analysis

We use the growth (g) and required rate of return (r) found previously with a 0.5% difference for

error to analyze the effect on the changes in the share price.

g+/-0.5%

r+/- 0.5%

24.47% 24.97% 25.47%

18.68% 4.09 3.77 3.49

19.18% 4.5 4.11 3.78

19.68% 4.99 4.52 4.13

Free Cash Flow To Equity Model

FCFE is a measure of the amount of cash the company is able to pay to the equity shareholders

after all expenses, reinvestment and debt repayments after tax obligations, and it is also used to

determine the value of the company.

FECF=Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt

- Debt Repayment

We will be using FCFE constant growth model for our valuation of intrinsic share value for

Keppel land. With the FCFE, we would be able to determine the value of the share and the

company based on the following formula:

Whereby:

P 0 = Value of share

Forecasted FCFE/share = Forecasted for FY2012

r = required rate of return on share

g = estimated growth rate of FCFE

The number shares we would be use the weighted average number of shares in 2011 and

would remain at 1,467,974.

The value of share is the present value of the future free cash flow per share.

The principal debt repayment is estimated to be $(444,503).

The new debts issued to be $595,476.

The growth rate as we have calculated before would remain constant at 18.68%.

The calculated intrinsic price of Keppel Land using the FCFE model is $3.24.


We use the growth (g) and required rate of return (r) found previously with a 0.5% difference for

error to analyze the effect on the changes in the share price.

g+/-0.5%

r+/- 0.5%

24.47% 24.97% 25.47%

18.68% 3.28 3.02 2.79

19.18% 3.6 3.29 3.03

19.68% 3.99 3.62 3.31

Price Earnings Ratio (P/E)

The Price/Earnings Ratio model (P/E) is used to measure the current share price to the earning

per-share. The P/E ratio shows how much earning is expected for every $1 invested in the

shares. This way, the companys share relative to the wealth of the company can be analyzed.

Comparison between similar market competitors would be useful to determine which company

is more worthwhile to invest.

A high P/E ratio suggests that investors are expecting higher earnings growth in the future

compared to companies with a lower P/E ratio. However, caution should be taken when using

the earnings as a denominator as it is based on accounting assumptions and thus is susceptible

to manipulation.

The P/E ratio is computed as follows:

P/E ratio = Dividend payout ratio

Required rate of return Growth

Assumptions and Limitations:

Dividend payout ratio is 0.22, from calculated retention ratio of 0.78.

The constant growth rate is estimated to be 18.68%.

The required rate of return is estimated to be 24.47%.

The number of Ordinary Shares issued is to remain at 1,467,974.

The current earnings is $1,467,974

The resultant P/E ratio is 3.8. Using adjusted Earnings per Share and estimated P/E ratio, the

intrinsic value of the share is $0.66. This is lower than the closing price of $2.22 in 1 December

2011. This may be due to the high retention ratio of Keppel Land thus, lowering the P/E and

hence, the share price of Keppel Land is overvalued. (Refer to Appendix for calculations of

intrinsic value using P/E)


The growth (g) and required rate of return (r) is derived based on 0.5%+/- of error to see the

effect of the changes in share price.

r+/-

0.5%

24.47% 24.97% 25.47%

g+- 0.5% 18.68% 3.8 3.5 3.24

19.18% 4.15 3.8 3.49

19.68% 4.59 4.15 3.8

Price/ Book Value Ratio (P/B)

Price/Book value (P/B) ratio is used to compare a stock market value against the book value of

the stock. The book value of the equity is derived from the companys assets, which is being

defined as the difference between the total assets, the intangible assets and liabilities. P/B will

be able to show investors whether the market believes the asset value overstated or that the

company is earning a negative returns on its assets.

Price-Book Value Ratio = ROE x payout ratio x (1+g)

r - g

Assumptions and limitations:

The estimated ROE as calculated before is 0.252

The payout ratio is 0.22

Growth rate is constant at 18.68%

Required rate of return calculated with CAPM is 24.47%

Based on the above formula and numbers, the P/B is 1.14. Using EPS and the P/B ratio, the

intrinsic value of the share price is $5.11. (Refer to Appendix for calculations) This is lower than

the market price of S$2.22 as at 1 December 2011. This shows that the Keppel Land share

price is undervalued.


The growth (g) and required rate of return (r) is derived based on 0.5%+/- of error to see the

effect of the changes in share price.

r+/- 0.5%

24.47% 24.97% 25.47%

g+- 0.5% 18.68% 1.14 1.05 0.97

19.18% 1.25 1.14 1.05

19.68% 1.38 1.25 1.14

Valuation Discussion

DDM

Dividend Discount Model is used to determine the value of a company's share price through

calculating the present price based on the future dividend payout of the company.

Keppel land is trading at $2.22 as of December 2012 which is at a discount of 30% as compare

to our valuation of $4.09.

DDM will be applicable for evaluation as the company had been rewarding shareholders with

dividend payout for the pass few year even during the sub-prime crisis in 2008. With

Therefore DDM can be applied to Keppel land, although the valuation should be used with the

aids of qualitative analysis.

With the value of $2.85 at the beginning of 2012, the share price has seen a steady upward

trend. This implied that its share price is currently undervalued and is a good investment

opportunity.

FCFE

For firms which did not pay dividends, a more suitable valuation will be the free cash flow model

that is depends on the present value of future cash flows. First of all is to estimate the free cash

flows, which will result from operations. Secondly, deduct existing liabilities to determine the

value of the firm. Third, divide the value of the firm by the number of shares to derive a value of

share.

Base on our valuation, the intrinsic value of the stock price is $3.24, which is above the market

share price of $2.22(undervalue). This suggests trading at a discount of 0.62% to the market

price

But the purpose of FCFE is to determine the value of the firms equity. In the case of Keppel

land, it is not appropriate to use FCFE model for valuation due to the firms dividend payout to

shareholders every years. And this model has a major limitation that is difficult to get the reliable

estimate of free cash flow period.

Price Earnings Ratio (P/E)

The P/E ratio is the most commonly used tool by investors to evaluate a companys stock. This

financial indicator shows how much an investor is willing to pay for a particular stock with

respect to the companys earnings. In general, a higher P/E ratio will signify that a company is

doing well and investors will be more than willing to invest in their stock. According to our

analysis using the adjusted EPS and estimated P/E ratio, the intrinsic value is much lower than

the market closing price as at 1 December 2011 despite the high growth. This may be due to

the high calculated retention rate of Keppel Land.

In addition, there are significant limitations in calculating P/E. The components computing the

P/E ratio may be inaccurate due to accounting rules and assumptions causing figures such as

the growth rate to be significantly inaccurate. Despite the negativity, this financial indicator is still

a popular tool to use when it comes to comparing the stock value to evaluate the performance

of the company.

Price Book Value Ratio (P/B)

The P/B value ratio provides a stable and intuitive measure of a value that can be compared to

the market price. Companies that have a lot of tangible assets such as machinery, tend to have

large book values. Keppel Land is an example of a capital intensive firm that owned buildings

such as The Ocean Financial Centre, Keppel Towers and One Raffles Quay.

P/B Ratio is also related to ROE, given two companies that are otherwise equal; the one with a

higher ROE will have a higher P/B ratio. Keppel Land which has a higher ROE; 25.2% than

GoucoLand which has a 5.17% only, has a high P/B value of 1.13. The company that can

compound book equity at a much higher rate is worth far more because book value will increase

more quickly. Therefore when looking at P/B, we need to relate it to ROE. If a company made

up of many liquid assets, the P/B ratio will thus be a reliable and a suitable method to screen for

an undervalued firm like Keppel Land.

Conclusion

Since our calculation is based on Keppel land 2011 annual report that is accurate as of 31

December 2011, we will compared the values found against the share price of Keppel land as of

31 December 2011 of $2.22.

Comparison with Intrinsic Values

Models Forecasted price Actual price Evaluation

Dividend Discount Model $4.09 $2.22 Undervalue

Free Cash Flow to Equity $3.24 $2.22 Undervalue

Price / Earnings Ratio $0.66 $2.22 Overvalue

Price / Book Earnings Ratio $5.11 $2.22 Undervalue

Keppel land has maintained a consistent payout ratio of 20% throughout the years. We expect

the company growth rate to increase for the next few years due to the high retention rate.

Throughout the last five years, Keppel land share has been quite volatile shown by the high

beta especially during the sub-prime mortgage crisis in 2008. After the crisis the share price

took a upward turn and have a share price of above $2 ever since.

The valuation models have shown that Keppel's share price with a mixed of overvalued and

undervalued, we like to point out that there are no ideal models to calculate the price as each

method uses different values for calculation.

Therefore we take DDM for valuation because this model is use for calculating the theoretical

value of shares for companies paying out dividends. From this, we recommend a BUY for

Keppel land shares.

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