CapitaLand - RHB Invest 2016-02-18: Lacks Near-term Drivers Despite Attractive Valuations

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CAPITALAND LIMITED C31.SI 

CapitaLand - Lacks Near-term Drivers Despite Attractive Valuations 

• As we sense a more challenging environment in FY16, we downgrade CapitaLand to NEUTRAL with a lower SGD3.15 TP (10% upside). 
• China residential sales have likely peaked in FY15, and we do not expect another record year given fewer launch-ready units this year. 
• China would increasingly be the focus, as Singapore FY15 revenue fell to one-third of total turnover following a deadpan domestic market. 
• CapitaLand trades near GFC P/BV level, but we see limited catalysts in sight to boost share price in the current market. 
• We prefer City Developments (CIT SP, BUY, TP: SGD9.18) for its ongoing restructuring efforts and purer country play. 

China residential sales lift FY15. 

• CapitaLand China achieved record sales of 9,402 units (FY14: 4,961 units), which helped to offset the inertia in Singapore residential sales (559 units in FY15 vs FY14’s 561 units). 

“One CapitaLand” ROE target. 

• Management guided that it would need an additional 1-2 years to achieve its sustainable ROE target of 8-12%. FY15 ROE stood at 6.1% (down 1ppt YoY). 
• We foresee the setting up of more private funds as the quickest means to boost ROE. 

Strong balance sheet with valuations at almost GFC level. 

• Despite limited catalysts, CapitaLand has amassed a sizeable war chest of SGD4.2bn in cash, with a low net gearing of 0.47x. It is attractively-priced at P/BV of 0.67x, below the historic average of 1.0x and just slightly above the global financial crisis (GFC) level of 0.60x. 
• At current levels, we think its downside risk is likely limited, especially with three quarters of its asset base on recurring income. 

Forecasts and risks. 

• We lower our FY16F-18F PATMI by 4-8% and ascribe smaller revaluation gains moving forward. 
• Key downside risks include a worse-than-expected slowdown in China’s economy and a sharp depreciation of CNY vs SGD. 
• We downgrade to NEUTRAL and lower our TP to SGD3.15 (vs SGD4.22) after increasing our discount to RNAV to 30% (vs 25%) in an environment of lower revaluations. 
• We keep our sights set on the: 
  1. future deployment of its capital on high-yield acquisitions, 
  2. setting up of more real estate private funds to boost ROE, and 
  3. possible lifting of Singapore’s cooling measures in 2H16, 
  which all may warrant a re-rating.

Ong Kian Lin RHB Research | http://www.rhbinvest.com.sg/ 2016-02-18

RHB Research SGX Stock Analyst Report NEUTRAL Downgrade BUY 3.15 Down 4.22