CapitaLand (CAPL SP) - Results Ahead; Time for a Breather; D/G to HOLD
Fair valuation post-rally on 6% higher TP; Prefer UOL
- 4Q16 was ahead of our and market expectations due to stronger-than-expected profit recognition from China. Nonetheless, the 6.7% ROE achieved for FY16 remains below its target range of 8-12%.
- While recurring income from 76% of its assets provide good earnings support amid the market headwinds, the relatively lower asset yields imply achieving a higher ROE will be difficult.
- We lowered FY17/18 EPS by 5% to adjust for the earlier-than-expected handover of homes, but raised our TP 6% to SGD3.66 as we roll-forward our valuation basis (29% discount to RNAV of SGD5.18). At 0.85x P/BV, we find the valuation fair considering prospective ROE of c.8%. Accordingly, we D/G to HOLD.
- Upside risks are from accretive capital deployment. Prefer UOL (BUY, TP SGD7.39) for sector exposure.
China home sales momentum to moderate
- FY16 net profit of SGD1.2b was 20% above our forecast.
- In 4Q16, CAPL delivered a record 6,507 homes worth CNY8.2b in China. Consequently, unbilled sales from China trended down to 5,000 homes worth CNY8.9b (3Q16: 9,800 homes worth CNY14b).
- Management has a sales target of 8,000 units for 2017, similar to its launch pipeline for the year. This is a moderation in sales momentum from the 10,700 units sold in 2016.
Capital deployment the key
- We believe CAPL has significant capacity to put its capital to work given comfortable net gearing of just 0.4x and strong cash balance of SGD4.8b.
- With the completion of major projects over the next few years, we see more capital being released for redeployment and will watch this area to assess the stock’s outlook. However, high land prices in its core markets, China and Singapore, have made finding accretive projects tough.
Decent earnings could drive ROE to 8% in 2017
- We believe CAPL could achieve its ROE target of 8% in 2017. Its recent bulk sale of The Nassim would already add SGD161m to 1Q17earnings and completion of key development projects should drive meaningful fair value gains.
- However, to achieve this ROE on a sustainable basis, we believe CAPL may need to optimise its capital structure by raising its leverage on stabilised assets and increasing its share of trading assets.
- Strong rebound in China and Singapore home sales.
- Monetisation of assets via a sale to its funds under management or third parties.
- Higher market value of its listed REITs.
- Overpaying for assets or land.
- Poor execution of development projects.
- Sharp increase in interest rates could hit demand for properties and drive down asset prices.