CapitaLand - RHB Invest 2016-08-05: Awaiting Catalysts

CapitaLand - RHB Invest 2016-08-05: Awaiting Catalysts CAPITALAND LIMITED C31.SI 

CapitaLand - Awaiting Catalysts

  • While CapitaLand’s valuations remain relatively cheap, at 0.7x 2016F P/BV, real estate headwinds continue to persist in its core operating markets of Singapore and China. 
  • Its balance sheet remains relatively strong, with a modest gearing of 0.49x providing acquisition opportunities. 
  • Key re-rating catalysts ahead would be the redeployment of capital in high-yielding acquisitions and the setting up of private funds to boost ROE. 
  • With limited upside catalysts in the near term, we maintain our NEUTRAL rating with an unchanged TP of SGD3.15 (1% downside)

Subdued in Singapore. 

  • CapitaLand expects the Singapore residential property market to remain subdued in the near term, with prices slowly declining over the next few quarters. 
  • While it managed to sell about thrice more units YoY in 1H16 (304 units), this came at the expense of price cuts of around 10-15% for some projects. Consequently, its 1H16 margin fell to 8.9% (1H15: 12.7%). 
  • Its strategy going forward is to de-risk its residential portfolio and redeploy capital into higher-yielding assets. Demand for its newly-launched “stay-then-pay” scheme has been strong, and is expected to move sales volumes in 2H16. In 2H16, it is expected launch its high-end project, Victoria Park Villas.

China sales remain steady. 

  • CapitaLand sold 2,896 units (2Q15: 2,764 units) in 2Q16, with a lower total sales value of CNY4.4bn (2Q15: CNY5.7bn). Its EBIT margin remained steady, at around 20%.
  • CapitaLand plans to launch around 7,000 units including projects already launched and we expect demand to remain steady in 2H16. 
  • On its China retail segment, overall rental reversion remains positive at 5.9%. However, weakness was seen in its Tier-3 shopping malls, with a reversion of -0.3% due to weak demand and higher supply.

Maintain NEUTRAL, with an unchanged TP of SGD3.15 pegged at a 30% discount to our RNAV. 

  • While valuations remain relatively cheap at 0.7x 2016F P/BV, the stock lacks catalysts on top of the cloudy outlook in its core operating markets. 
  • Key re-rating catalysts would be the re-deployment of capital in high- yielding acquisitions boosting ROE, the setting up of more real estate private funds and the potential relaxation of policy measures in Singapore and China.

Results were broadly in line. 

  • CapitaLand’s core 1H16 PATMI of SGD324.4m accounted for about 42% of our full-year forecast. 
  • Headline 2Q16 PATMI declined 33% YoY, mainly due one-off fair value gains of SGD125.9m recognised last year from the change of use of development projects.
  • Excluding one-off items, core PATMI rose 31.8% YoY, mainly on the back of higher contributions from shopping malls, China development projects and its serviced residence business. 
  • We expect 2H16 revenue to remain strong with about CNY7.8bn revenue expected to be recognised from its China residential property projects.

Impact of weakening CNY. 

  • CapitaLand guided that a 1% depreciation of CNY vs SGD will have a negative impact of 0.2% on its net profit and 0.9% impact on shareholders’ equity. It does not intend to hedge the income stream due to high associated costs but has a natural hedge via CNY-denominated loans. 
  • With the SGD strengthening 7.8% YTD against the yuan, management plans to mitigate risks by increasing its CNY-denominated borrowings and issuing panda bonds in the future.

Ascott is the key growth driver. 

  • CapitaLand’s serviced residence segment Ascott’s overall revenue per available unit (REVPAU) remained steady at SGD117 despite tough global macro-economic conditions. 
  • The group currently runs about 28,358 units across globe and has about 18,592 units under development, with 2,400 units expected to come on-stream in 2H16. When fully completed, CapitaLand’s recurring fee income is expected to increase by an additional SGD73m annually (~10% of PBT) boosting ROE.

Vijay Natarajan RHB Research | http://www.rhbinvest.com.sg/ 2016-08-05
RHB Research SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.15 Same 3.15