CapitaLand - RHB Invest 2017-03-01: Asset-Light Strategies To Boost Returns

CapitaLand - RHB Invest 2017-03-01: Asset-Light Strategies To Boost Returns CAPITALAND LIMITED C31.SI

CapitaLand - Asset-Light Strategies To Boost Returns

  • Maintain NEUTRAL, with a revised TP of SGD3.60 (from SGD3.15, 1% downside) as we expect limited upside post the recent run-up in its share price (+20% YTD). 
  • We see two key reasons for its recent outperformance: 
    1. CapitaLand’s focus on asset-light strategies to enhance returns; 
    2. Renewed interest in developers amidst a spate of privatisation talks. 
  • Recurring income is set to receive a boost, with contributions from the Ascott acquisitions and the opening of eight retail malls in 2017. 
  • Still, operating conditions continue to remain challenging in its core markets.

Focus on asset-light strategies. 

  • Amidst a challenging environment, CapitaLand has been pursuing an asset-light strategy of building up private real estate funds, expanding its serviced residence and retail portfolio through management contracts and acquiring accretive income-producing assets. 
  • While the moves are a step in the right direction, we believe CapitaLand would need a few more years before it can achieve its sustainable ROE target of 8-12%.

Eight retail malls to come on-stream in 2017. 

  • This year, the company is to open eight shopping malls (six in China, one in Malaysia and one in India) with a record 1m sqm of retail GFA. Of these, three belong to its high-end Raffles City portfolio across key China cities of Shanghai, Shenzhen and Hangzhou. 
  • These malls, when fully opened, would further boost its recurring income portfolio, which currently accounts for more than c.76% of total assets.

Accelerating Ascott’s growth. 

  • CapitaLand has been aggressive in expanding Ascott’s footprint, with the addition of 10,500 serviced units globally last year (+57%YoY). 
  • Ascott currently has a portfolio of 52,000 units (22,000 still under development). 
  • Newly-acquired units are expected to contribute an additional SGD25-30m in fee income annually upon completion and stabilisation.

Cautious on Singapore market. 

  • In light of the subdued outlook for the Singapore residential segment, it has been trimming inventory – the latest being the bulk sale of the remaining 45 units in The Nassim – and reaping a gain of SGD161m from sales. 
  • It also launched its Stay-Then-Pay programme to move sales at D’Leedon, The Interlace and Sky Habitat have been well-received so far. 
  • Overall, it has been cautious in replenishing its depleting Singapore landbank and has been deploying capital mainly in overseas markets.

China portfolio focused on Tier-1&2 cities. 

  • About 93% of its China properties are focused on Tier-1&2 cities in China, where prices have remained resilient despite housing restrictions. 
  • It has about 8,000 launch-ready units and will be handing over 5,000 units worth CNY8.9bn in FY17.

Maintain NEUTRAL, with a higher TP of SGD3.60 pegged at a 25% discount (from 30%) to a revised RNAV of SGD4.80. 

  • Our revised RNAV factors in contributions from acquisitions and a higher valuation for Ascott, as well as its fund management business. 
  • Key re-rating catalysts are the setting up of more real estate private funds, opportunistic M&As and the relaxation of policy measures in Singapore and China. 
  • The main upside risk to our forecasts would be early removal of cooling measures; while the key downside risk would be a prolonged real estate slowdown in key operating markets.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-03-01
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.60 Up 3.150