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.

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.

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%.

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.

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.

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

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