CapitaLand - DBS Research 2017-06-05: Optimising Capital Through Asset Reconstitution Strategy

CapitaLand - DBS Vickers 2017-06-05: Optimising Capital Through Asset Reconstitution Strategy CAPITALAND LIMITED C31.SI

CapitaLand - Optimising Capital Through Asset Reconstitution Strategy

  • Divests Innov Tower for a 25% gain on valuation.
  • To re-invest proceeds in newly completed Guozheng Center which is estimated to deliver higher returns in the medium term.
  • Capital recycling a hallmark of CapitaLand’s proactive asset management strategy.

What’s New 

  • Capitaland reported the following asset reconstitution strategy in China: 

Divestment of Innov Tower (RMB 1.56bn) 

  • Divestment of Innov Tower at Shanghai Xuhui District for RMB1.56bn (S$316m) or RMB38,500 sqm. 
  • A net profit of c.S$85m expected or c.25% over the latest valuation.
  • The property comprises one 23-storey office block and is 99% occupied at end-April 2017.
  • Using an estimated RMB6/day rent for the property, exit yield is approximately 3.7%.

Investment in Guozheng Center (RMB2.64bn) 

  • Acquisition price at RMB2.64bn (S$535m) or RMB32,713 psm. Guozheng Center is a recently completed property in 4Q16 and is located at Wujiaochang, a fast growing decentralised business district in the northern district.
  • Occupancy rate as of end-April 2017 is 23% with active interest in the remaining space.
  • Assuming full occupancy of RMB6/day, entry yield estimated to 4.3% with a potential to hit closer to 5% in our view, in the medium term, riding on the strengthening rental outlook in the medium term.

Our thoughts.

  • This is the hallmark of CapitaLand’s portfolio reconstitution strategy, realising value from more mature assets (Innov Tower) and redeploying proceeds to properties with further upside potential (Guozheng Center) when the property is fully leased and expect the group to lock in further with potential capital gain when prices stabilise in the medium term.
  • This allows CapitaLand to optimise and enhance returns.
  • Gains of S$85m will provide a further boost to the group’s earnings for FY17F and push it nearer to the targeted ROE target of 8.0%.

Maintain BUY on CapitaLand, TP of S$4.33.

  • We expect further momentum in terms of CapitaLand’s capital deployment in the key cities of China and Singapore, which we believe provides fundamental support to the persistent buoyancy of the share price. 
  • We have a BUY on CapitaLand, with a TP of S$4.33 that is based on a 10% discount to RNAV.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-06-05
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.330 Same 4.330