• Good opportunity to hedge here
• Implied chance of privatization given mkt price: 73%-77%
• Main recommendation: accept offer

Current prices offer good hedging opportunity

We are now one week from the offer deadline and see better-than-even odds for KepLand’s privatization but, at the same time, also highlight that KepCorp – a 54.6% holder before the offer – will require significant acceptances in excess of 35.4% to cross the 90% compulsory acquisition threshold for the higher offer price of S$4.60 to take effect; and that there has been limited visibility regarding the level of acceptances to date. In Mar15 so far, we note that KepLand has been trading with decent volume in the S$4.54 to S$4.55 range, which translates to an implied probability of 73% - 77% that the offerer will cross the threshold. In our judgment, this could be somewhat rich and offers a prime hedging opportunity for those planning to accept the offer. They can divest a portion of their KepLand positions in the market at S$4.54 - S$4.55, effectively paying an opportunity cost of S$0.05 – S$0.06 (only 1.1% to 1.3% of S$4.60) to lock in S$4.60 and hedge out the downside risk of a significantly lower S$4.38 offer price.

A recap: voluntary unconditional cash offer by KepCorp

To recap, on 25 Jan 2015, KepCorp announced a voluntary unconditional cash offer for its real estate unit KepLand, and will offer S$4.38 in cash for each share that it does not already own or control. In the event that the level of acceptances brings KepCorp over the compulsory acquisition threshold of 90%, the offer price will be adjusted to S$4.60 per share in cash. Note that both offer prices include KepLand’s proposed final FY14 dividend of S$0.14 and that both offer prices are final. Given uncertain outlooks for KepLand’s core development businesses in Singapore and China, we believe this is a reasonable enough offer and allows minority shareholders to exit at a share price above the pre-offer 36-month high. Our main recommendation is for KepLand shareholders to ACCEPT THE OFFER.

Source: OCBC Research - 5 Mar 2015