CapitaLand - Asset-Light Strategies To Boost Returns
- Maintain NEUTRAL, with a revised TP of SGD3.60 (from SGD3.15, 1% downside) as we expect limited upside post the recent run-up in its share price (+20% YTD).
- We see two key reasons for its recent outperformance:
- CapitaLand’s focus on asset-light strategies to enhance returns;
- Renewed interest in developers amidst a spate of privatisation talks.
- Recurring income is set to receive a boost, with contributions from the Ascott acquisitions and the opening of eight retail malls in 2017.
- Still, operating conditions continue to remain challenging in its core markets.
Focus on asset-light strategies.
- Amidst a challenging environment, CapitaLand has been pursuing an asset-light strategy of building up private real estate funds, expanding its serviced residence and retail portfolio through management contracts and acquiring accretive income-producing assets.
- While the moves are a step in the right direction, we believe CapitaLand would need a few more years before it can achieve its sustainable ROE target of 8-12%.
Eight retail malls to come on-stream in 2017.
- This year, the company is to open eight shopping malls (six in China, one in Malaysia and one in India) with a record 1m sqm of retail GFA. Of these, three belong to its high-end Raffles City portfolio across key China cities of Shanghai, Shenzhen and Hangzhou.
- These malls, when fully opened, would further boost its recurring income portfolio, which currently accounts for more than c.76% of total assets.
Accelerating Ascott’s growth.
- CapitaLand has been aggressive in expanding Ascott’s footprint, with the addition of 10,500 serviced units globally last year (+57%YoY).
- Ascott currently has a portfolio of 52,000 units (22,000 still under development).
- Newly-acquired units are expected to contribute an additional SGD25-30m in fee income annually upon completion and stabilisation.
Cautious on Singapore market.
- In light of the subdued outlook for the Singapore residential segment, it has been trimming inventory – the latest being the bulk sale of the remaining 45 units in The Nassim – and reaping a gain of SGD161m from sales.
- It also launched its Stay-Then-Pay programme to move sales at D’Leedon, The Interlace and Sky Habitat have been well-received so far.
- Overall, it has been cautious in replenishing its depleting Singapore landbank and has been deploying capital mainly in overseas markets.
China portfolio focused on Tier-1&2 cities.
- About 93% of its China properties are focused on Tier-1&2 cities in China, where prices have remained resilient despite housing restrictions.
- It has about 8,000 launch-ready units and will be handing over 5,000 units worth CNY8.9bn in FY17.
Maintain NEUTRAL, with a higher TP of SGD3.60 pegged at a 25% discount (from 30%) to a revised RNAV of SGD4.80.
- Our revised RNAV factors in contributions from acquisitions and a higher valuation for Ascott, as well as its fund management business.
- Key re-rating catalysts are the setting up of more real estate private funds, opportunistic M&As and the relaxation of policy measures in Singapore and China.
- The main upside risk to our forecasts would be early removal of cooling measures; while the key downside risk would be a prolonged real estate slowdown in key operating markets.