CapitaLand - RHB Invest 2017-12-19: Focusing On Asset-Light Strategies For Growth

CapitaLand - RHB Invest 2017-12-19: Focusing On Asset-Light Strategies For Growth CAPITALAND LIMITED C31.SI

CapitaLand - Focusing On Asset-Light Strategies For Growth

  • CapitaLand’s strategy of boosting recurring income from retail mall openings and expansion of its Ascott portfolio are set to bear fruit in 2018. 
  • Residential outlook especially on China projects remain challenging with the tightening policy measures by the Chinese Government. In Singapore, CapitaLand has limited residential inventory. 
  • Investors would remain focussed on CapitaLand achieving a sustainable ROE target of 8% which we believe is work in progress. 
  • Maintain NEUTRAL with a SGD3.90. A good entry level would be below SGD3.40 (13% upside).

Retail recurring income set to receive a boost in 2018. 

  • CapitaLand opened eight retail malls in 2017 which would start contributing fully in 2018. 
  • The group has also been focusing on expanding its retail fee income base, with the signing of six mall management contracts in China, and one in Singapore It has also been proactive in tackling the e-commerce threat, by forging alliances with Alibaba Group (BABA US, NR) and Lazada Group SA, as well as positioning itself as an omni-channel retail landlord.

Focus on asset-light strategies to boost ROE’s. 

  • Amidst a challenging market for acquisitions, CapitaLand has turned its strategy of delivering growth from asset-light strategies. Recent moves in this direction include building up private real estate funds, expanding its serviced residence and retail portfolio through management contracts and acquiring accretive income-producing assets via JV structures. 
  • 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%, which would be its key re-rating catalyst.

Residential segment outlook. 

  • CapitaLand has been turning cautiously optimistic on the Singapore residential market, but would continue to adopt a disciplined approach on acquisitions – with location being a key factor. We note that CapitaLand currently has very limited unsold residential inventory (< SGD1bn or < 2% of total assets) and not acquired residential sites in last few years. 
  • In China, residential cooling measures are slowly starting to take effect and sales growth is expected to slow down in 2018. However, CapitaLand has > 8,000 units sold and yet to be recognised, with a sale value of CNY13.8bn, which would contribute positively for 2018 earnings.

Ascott – a key growth income driver. 

  • Ascott added 19 properties to its portfolio in 3Q17, and currently has about 70,000 units under management. It is well on track to exceed its target of achieving 80,000 units by 2020. Newly- acquired units are expected to contribute an additional SGD25-35m in fee income annually upon completion and stabilisation.

Maintain NEUTRAL with a TP of SGD3.90

  • Maintain NEUTRAL with a TP of SGD3.90, pegged at a 20% discount to RNAV of SGD4.87
  • Key re-rating catalysts would be the relaxation of policy measures in Singapore and China and continued boosting of recurring income. 
  • Key downside risk is a prolonged real estate slowdown. 
  • We recommend investors to accumulate below SGD 3.40 as a good entry level.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.900 Same 3.900