Capitaland - RHB Invest 2016-09-14: A Slow-Moving Giant

Capitaland - RHB Invest 2016-09-14: A Slow-Moving Giant CAPITALAND LIMITED C31.SI

Capitaland - A Slow-Moving Giant

  • CapitaLand’s strategy of shifting its prime focus to China has not yielded the desired returns yet on the back of competitive pressures, weak economic growth and tighter regulatory measures. 
  • While shareholders equity has grown at a 10-year CAGR (2006-2015) of 8.9% pa, net profit growth during the same period was just 0.5% pa. 
  • ROEs have been below par at 5-7% over the last four years vs the 10-year average of 11%. 
  • Ascott remains the bright spot, with a steady pipeline of serviced residence units opening in coming years boosting recurring income.

Shifting its focus away from home in search of better returns. 

  • While EBIT contributions from Singapore accounted for about 50-60% of total in 2006-2007, this proportion has come down to 40% in 2015. Meanwhile contributions from China have nearly doubled to 39% of EBIT in 2015 (2006: 20%). Key reason being its shift in strategy of focusing on bigger markets (huge population base) in search of better returns. 
  • However, tough real estate market conditions in China and Singapore, on the back of a slowing economy, tighter policy measures and increased competitive measures, have made it difficult to execute good quality acquisitions whilst squeezing margins.

Sub-optimal earnings growth. 

  • While CapitaLand’s shareholders equity has grown at a 10-year CAGR (2006-2015) of 8.9% pa to SGD17.9bn as at end- 2015, the corresponding CAGR in net profit was just 0.5% pa. This was mainly due to sub-optimal ROE returns of 5-7% over the last four years vs the 10-year average of 10.9%.

ROE target in focus. 

  • Management had set a “One CapitaLand” ROE target of 8-12% in 2013, but it has been facing difficulties in achieving it. This was due to tough operating conditions in its core markets of Singapore and China. 
  • We foresee the setting up of more private funds and executing strategic M&As as the quickest means to boost ROE.

Ascott the bright spot. 

  • CapitaLand’s wholly-owned subsidiary, The Ascott (Ascott), is currently the world’s largest international serviced residence owner and operator. As at end-2015, Ascott owned and managed about 43,000 units in 277 properties across 95 cities and 27 countries in the Asia-Pacific, Europe, the Gulf regions, as well as in the Americas. It has a pipeline of 18,592 units currently under development, which – when fully completed – will boost recurring income by an additional SGD73m annually (~9% of 2015 core PATMI), thus helping to underpin ROEs.

Maintain NEUTRAL, TP of SGD3.15. 

  • Valuations remain relatively cheap at 0.7x FY16F P/BV. 
  • Nevertheless, we believe the stock lacks catalysts whilst the outlook in its core operating markets remains clouded. 
  • Key re-rating factors include the re-deployment of capital into high-yielding acquisitions to boost ROEs, the setting up of more real estate private funds, and the potential relaxation of policy measures in Singapore and China. 
  • Our TP is pegged at a 30% discount to its RNAV of SGD4.50.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2016-09-14
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.15 Same 3.150