Capitaland - DBS Research 2016-08-05: Stronger earnings ahead

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CAPITALAND LIMITED C31.SI 

Capitaland - Stronger earnings ahead

• 2Q16 core operating earnings up 22%.
• Improving earnings quality with higher focus on building recurring income.
• BUY, TP S$3.60.

Improved earnings quality. 

• We believe that CapitaLand Limited (CAPL) offers good value, trading at an attractive 0.75x P/Bk and 0.65x P/RNAV. The group’s strategy to focus on growing its commercial portfolio should bear fruit over time, as its earnings profile becomes less volatile. 
• Coupled with opportunistic asset recycling of mature assets into its listed REITs/funds, there is ample upside potential to our earnings estimates. 
• We maintain our BUY call with a target price of S$3.60.

Growing recurring revenues from retail mall portfolio and Ascott. 

• Its current property portfolio has up to 75% of assets in retail malls, and commercial integrated developments, including Ascott Group, which offer strong income visibility in the medium term. 
• We expect the operating performance of its malls to improve as the properties reach maturity, boosted by the completion of four Raffles City mega developments in China in the medium term.

Launch of new PE funds to boost returns. 

• Leveraging on its fund management expertise, CAPL aims to launch 5-6 private equity (PE) funds with funds under management of S$8-10bn by 2020. 
• We think that by tapping on third-party capital, CAPL would be able to leverage on its larger scale to achieve better economies of scale, capitalise on market opportunities, and at the same time, de-risk its property exposure.

Valuation:

• Our target price of S$3.60 is based on a 25% discount to our adjusted RNAV of S$4.80/share, tweaked slightly as we update project completion assumptions, and lower our margin assumptions. 
• Our RNAV is based on our estimates of the market valuations of its various property developments and investment property assets across its various divisions.

Key Risks to Our View:

• Slowdown in Asian economies. The risk to our view is if there is a slowdown in Asian economies, especially China, which could dampen demand for housing and private consumption expenditure and retail sales.

Derek Tan DBS Vickers | Rachel Lih Rui Tan DBS Vickers | http://www.dbsvickers.com/ 2016-08-05

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.60 Down 3.70