CapitaLand (CAPL SP) - UOB Kay Hian 2016-11-10: 3Q16 Results Boosted By Contributions From Development Property

CapitaLand (CAPL SP) - UOB Kay Hian 2016-11-10: 3Q16 Results Boosted By Contributions From Development Property CAPITALAND LIMITED C31.SI

CapitaLand (CAPL SP) - 3Q16 Results Boosted By Contributions From Development Property

  • 3Q16 results were in line with expectations. 
  • Overall operating net profit grew 55% yoy, boosted by contributions from Singapore and China residential projects. 
  • Despite headwinds in Singapore and China, the group plans to retain focus on these core markets and the growth markets of Vietnam and Indonesia, as well as the serviced residence global platform. 
  • Maintain BUY and target price of S$4.05, pegged at a 20% discount to our RNAV of S$5.06/share.


RESULTS


Results in line with expectations. 

  • CapitaLand (CAPL) reported 3Q16 net profit of S$247.5m, up 28.4% yoy, as top-line grew 27.7% yoy due to higher contributions from Singapore and China residential projects, and higher rental income. The slower 7.7% yoy growth in EBIT was a result of asset divestment and the lack of valuation gains from acquisitions. 
  • Overall operating net profit still grew 54.5% yoy on stronger operating performance. 
  • Results were in line with expectations, with 9M16 core net profit of S$576.2m forming 79.4% of our full-year forecast.
  • Slight dip in net gearing to 0.47x (2Q16: 0.49x) with average debt maturity at 3.5 years (2Q16: 3.7 years). Assuming a comfortable gearing threshold of 0.5x, we opine CAPL’s debt headroom stands at about S$1.2b. The group’s NTA per share was S$3.90 as at end-Sep 16 (2Q16: S$3.84).
  • CapitaLand Singapore saw 3Q16 EBIT rise 25% yoy, mainly due to commencement of sales and revenue recognition from Cairnhill Nine and The Nassim as well as higher rental income from CCT and CapitaGreen. 
  • CapitaLand China also registered strong EBIT growth of 30% yoy in 3Q16, on the handover of 3,254 units. These were mainly from completion of 8 blocks from Riverfront in Hangzhou and 3 blocks from Dolce Vita in Guangzhou, as well as sales and handover of completed units from International Trade Centre in Tianjin, La Botanica in Xian, Vermont Hills in Beijing and New Horizon in Shanghai.


STOCK IMPACT


Strong residential interest in Singapore, coupled with healthy sales in China. 

  • 3Q16 saw residential sales value in Singapore climb 382% yoy to S$525m, with 206 units sold on the back of strong sales at d'Leedon, The Interlace and The Nassim. 
  • Meanwhile, development projects in China saw a 55% yoy growth in sales value to Rmb5.8b, with 2,903 units sold in 3Q16. 
  • CAPL also expects to hand over 9,800 units (~Rmb14b) from 4Q16 with about Rmb5.6b in sales value to be recognised in 4Q16. CAPL also expects 2016 sales in China to outperform that in 2015.

Less-than-sanguine outlook on Singapore. 

  • Management expects the property cooling measures to remain a drag on the market. We note that CAPL is expected to see S$5.1m in extension charges in 2H16 from The Interlace (5% unsold) and d'Leedon (5% unsold).
  • We note CAPL has rolled out the creative “stay then pay” initiatives for both these projects, which saw decent response. Newly launched 109-unit Victoria Park Villas saw 17 units sold as at end-Oct 16 while 55-unit The Nassim saw another 5 units sold in 3Q16. 
  • Management has opined that office rentals in Singapore will likely remain depressed. The retail portfolio is expected to provide stable recurring income to cushion domestic headwinds.

Property cooling measures in China. 

  • While management conceded the likely impact of the measures on residential sales, they opine that their target clientele of first-time buyers and upgraders will render such measures less significant.

Remaining focused on core markets Singapore and China. 

  • Despite domestic headwinds in Singapore, the group plans to retain focus on core markets Singapore and China, growth markets of Vietnam and Indonesia, as well as the serviced residence global platform. They expect 1,840 launch-ready units in China in 4Q16. 
  • Management had previously guided for a comfort level of up to 5-10% exposure in Southeast Asia, with capex guidance of S$1.5b-2b, excluding new acquisitions. 
  • We note that China and Singapore make up 45% and 36% of total asset value respectively in 3Q16.

ROE target of 8-12% (from 6% annualised currently) achievable through potential asset recycling to its REITs. 

  • In Singapore, these assets could include Star Vista (yield on valuation: 6.3%, cap rate: 5.75%) and to a certain extent, Ion Orchard (yield on valuation: 5.7%, cap rate: 4.9%). 
  • In China, potential divestments could include the Raffles City portfolio of four assets - Shanghai, Beijing (yield on valuation: 7%), Chengdu, Ningbo (yield on valuation: 3-4%). 
  • Note that our 2016 estimated ROE is based on core net profit while the above annualised ROE of 6% is based on 9M16 net profit of S$759.8m (annualised).


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$4.05, pegged at a 20% discount to our RNAV of S$5.06/share.


EARNINGS REVISION

  • None.


SHARE PRICE CATALYSTS

  • Improving sentiment in core markets Singapore and China.
  • Relaxation of property cooling measures.




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-10
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.050 Same 4.050




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