CapitaLand (CAPL SP) - Maybank Kim Eng 2017-05-29: Awaiting A Better Entry Point

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CAPITALAND LIMITED C31.SI

CapitaLand (CAPL SP) - Awaiting A Better Entry Point

Maintain HOLD; Awaiting better entry point 

• We raise our TP for CapitaLand to SGD3.75 (from SGD3.70) on higher RNAV and unchanged target discount of 29%. 
• The RNAV uplift stems mainly from higher valuation for its fund management business. With a shrinking exposure to the Singapore market, we believe CAPL is not a major beneficiary of a property price rebound and the stock could decouple from trends in the local market. 
• Nonetheless, ROEs could trend higher in the year ahead as key projects in China get completed.
• Maintain HOLD.

Key changes and assumptions 

• We keep our ASP assumptions for unsold stock in Singapore unchanged as most projects have been launched. Either way, any potential uplift to home prices will have minimal impact on CAPL given its shrinking exposure to the local market. 
• We fine-tune our valuations to incorporate the portfolio of Japan commercial properties recently acquired and lift our valuation for its fund management arm to 20x P/E (from 15x) to align with exit multiples for ARA Asset Managemen.
• RNAV is raised from SGD5.18 to SGD5.25.

Investment thesis 

• Management’s cautious stance towards the Singapore residential market has led to a shrinking local exposure. This implies that it is not a prime beneficiary of a potential rebound in Singapore property prices.
• Nonetheless, we expect ROEs to improve in the year ahead as key projects in China get completed. However, in order to achieve its target ROE on a sustainable basis, we believe CAPL may need to optimise its capital structure by raising its leverage on stabilised assets and increasing its share of trading assets.

Swing Factors

Upside

• Strong rebound in China and Singapore home sales.
• Monetisation of assets via a sale to its funds under management or third parties.
• Higher market value of its listed REITs.

Downside

• Overpaying for assets or land.
• Poor execution of development projects.
• Sharp increase in interest rates could hit demand for properties and drive down asset prices.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-05-29

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.75 Up 3.700