CapitaLand Limited - Phillip Securities 2017-12-18: Stable Base Of Recurring Income

CapitaLand Limited - Phillip Securities 2017-12-18: Stable Base Of Recurring Income CAPITALAND LIMITED C31.SI

CapitaLand Limited - Stable Base Of Recurring Income

  • Building up a base of quality recurrent income at a CAGR of c.16% (Operating EBIT growth 2013-16). Around 85% of CapitaLand's total assets are now earmarked for recurrent income.
  • Office markets in Singapore and China are showing signs of improvement, while RevPAUs for serviced residences experience recovery in key markets.
  • Maintain ACCUMULATE with a target price of S$4.19.



BACKGROUND

  • CapitaLand (CAPL) is one of Asia’s largest real estate companies. Headquartered and listed in Singapore, it is an owner and manager of a global portfolio worth more than S$85bn as at 30 September 2017, comprising integrated developments, shopping malls, serviced residences, offices, homes, real estate investment trusts (REITs) and funds. 
  • Present across more than 150 cities in over 30 countries, the Group focuses on Singapore and China as core markets, while it continues to expand in markets such as Vietnam and Indonesia.


INVESTMENT MERITS / OUTLOOK 


1. Stable base of recurring income built up over the years provides income stability. 

  • With 85% of CapitaLand's assets being investment properties (predominantly in Singapore and China) contributing to recurring income, CapitaLand's earnings outlook remains stable. 
  • A record one million square metres of retail GFA opened in 2017, which will be CapitaLand's largest-ever retail GFA offering in a single year, is expected to boost recurring income growth in FY18e onwards as occupancy and tenant sales ramp up. 
  • RMB13.8bn worth of China residential sales are expected to be handed over and recognised mostly from 4Q17 to FY18 (vs FY17YTD: RMB9.3bn), which will provide further support to earnings over the next FY.

2. Office markets in Singapore and China show signs of improvement, while RevPAUs for serviced residences are seeing recovery in key markets. 

  • With the exception of the 2 Raffles City office components which started operations last year (Shenzhen and Hangzhou), average occupancy for CapitaLand's entire office portfolio stand at c.98%, a marked improvement especially in China where occupancy averaged c.90% as at FY16. 
  • Ascott’s three largest markets (by total units) - Southeast Asia/Australia (ex-Singapore), China, Europe rebounded and grew 2-4% in YTD17 in local currency terms. China and Europe, in particular, are showing strong rebounds in RevPAUs after YoY declines for FY16.

3. Tapping on key competitive advantage to evolve into Asset-Light Model for more sustainable future growth. 

  • CapitaLand's new asset-light management contract model for retail acts as a kicker for ROE, allows CapitaLand to expand network and brand visibility without huge capital expenditure, and paves the way for future acquisition as they take on management contract roles for third-party malls with a right of first refusal.


RECOMMENDATION

  • Maintain ACCUMULATE with target price of S$4.19. 
  • There are signs of recovery for CapitaLand's main markets for office and serviced apartment segments in respective key markets. We expect this recovery to sustain as global economies recover. 
  • With a strong base of stable recurring income, CapitaLand's asset-light management contract strategies for its retail and serviced residence segments also enables it to accelerate network and fee revenue growth. 
  • We like CapitaLand's quality of earnings that have become more recurrent in nature.








Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2017-12-18
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 4.190 Same 4.190



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