CapitaLand - RHB Invest 2018-01-08: Making The Right Moves

CapitaLand - RHB Invest 2018-01-08: Making The Right Moves CAPITALAND LIMITED C31.SI

CapitaLand - Making The Right Moves

  • We are positive on CapitaLand’s recent divestments of non-core retail assets in China and India. In our view, the move clears an overhang on market concerns over its retail assets in Tier-2 & 3 cities amidst the threat of an oversupply and rise in e-commerce. 
  • At the same time, the company has been expanding its presence through management contracts, which we believe is the right strategy. With its recurring income base growing, focus on asset light strategies and sharper market focus, we believe it now has the right ingredients to deliver long-term growth. 
  • As its share price trading at a steep ~37% discount to RNAV, we believe the risks are well priced in. Upgrade to BUY (from Neutral) with a higher TP of SGD 4.20 (from SGD3.90, 15% upside).

Retail portfolio reconstitution a step in right direction. 

  • CapitaLand announced a divestment of its stake in 20 retail assets in China for an agreed value of CNY8.4bn (SGD1.7bn), 7% higher than its latest valuation. Based on its stake (which ranges from 30-70%) the divestment would generate net proceeds of SGD660m and result in a net gain of SGD75m. The divested malls located across 19 Chinese cities accounted for 4% of CapitaLand’s total mall portfolio (and contributed ~2.2% of group EBIT in 2016). The move closely follows the recent divestment of its stake in six retail malls in India.
  • We view the divestments favourably as it results in a sharper portfolio with a focus on dominant malls in core Chinese city clusters (its presence is reduced to 22 cities from 36 cities). 
  • It also lowers the risk of retail exposure to Tier-3 cities where it lacks scale and faces oversupply concerns (< 2% of its China malls would be in Tier-3 cities post divestments) and unlocks capital from mature assets. 
  • The divestments are expected to be completed by 2Q18.

Expanding its retail presence through management contracts. 

  • Building on an asset light strategy, it has signed seven mall management contracts (six in China and one in Singapore). 2017 was also a record year for CapitaLand during which it opened eight new malls (1m sqm) across China, Singapore and Malaysia. 
  • We expect the recurring income stream from the newly opened malls to more than offset the loss of income from recent divestments.

Prudent approach in residential landbanking. 

  • One of CapitaLand’s concerns has been its limited Singapore residential inventory (< SGD1bn or < 2% of total assets) with the market at the cusp of a potential recovery. While we note that its landbank is running low, we believe its prudent approach makes sense amidst the current intense completion, which has driven up the land costs by 20-40%. 
  • We expect the company to continue to selectively bid for residential land and potentially acquire one or two sites in 2018.

Upgrade to BUY with a higher TP of SGD4.20. 

  • We revise our RNAV higher by 2% after factoring in recent acquisitions and divestment gains. We also lower our RNAV discounts to 15% (from 20%) on the back of a better economic outlook which should benefit its property portfolio. 
  • Our FY18F-19F earnings are adjusted higher by 3% and 5% after factoring in recent acquisitions and divestments. 
  • We also see the possibility of potential special dividends from divestment gains which could act as a near term re-rating catalyst. 

Building its recurring income base. 

  • Investment properties (stabilised) now account for 77% of its portfolio compared to 68% in 2014. The recent maiden acquisition of office property in Germany (Main Airport Center, Frankfurt) reiterates the strategy of building a stable income portfolio. 
  • The growth of its recurring income base provides income stability and helps to smoothen out the earnings volatility amidst uncertain macroeconomic conditions.

Ascott – a key growth driver. 

  • 2017 was a record year for the Ascott portfolio with the addition of 24,000 units, taking its global portfolio to 72,000 units. With the latest acquisitions, Ascott is well on track to exceed its target of achieving 80,000 units by 2020. 
  • Management noted that every 10,000 unit addition is expected to contribute a further ~SGD25-30m in fee income annually upon completion and stabilisation.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-08
RHB Invest SGX Stock Analyst Report BUY Upgrade NEUTRAL 4.20 Up 3.900