CapitaLand (CAPL SP) - Maybank Kim Eng 2018-02-13: Good Entry Point

CAPITALAND LIMITED C31.SI

CapitaLand (CAPL SP) - Good Entry Point

CapitaLand surprised the market with a stronger DPS of 12cts, which translates into a credible yield of 3.5%.
Enbloc purchase of Pearl Bank Apartment has addressed the lack of development pipeline in Singapore and adds 3 cts to our RNAV/shr. Successful implementation of its portfolio reconstitution strategy could add 1ppt to its annual ROE.
With enhanced yield appeal and stronger Singapore pipeline, we raise our Target Price to SGD4.10 (from SGD3.75). This reflects a narrower RNAV discount of 25% (from 30%) and we roll forward our valuation basis to 2018E.

Recent CapitaLand share price weakness presents a good entry point. Upgrade to BUY from HOLD.

FY17 PATMI of SGD1.55b was in line with our forecast of SGD1.56b. ROE hit 8.5% and is the best showing since 2010. Higher DPS of 12 cts (FY16: 10cts) was commendably above our estimate of 11cts.
Considering its large recurring income base (70-80% of assets), the current payout is sustainable. We also see it as a way to optimise its capital structure.
Its leverage remains conservative with net gearing at 0.49x, which implies sizeable debt headroom of SGD5b should gearing reach its guided level of 0.64x. This leaves room for more deals, which could drive further upside to RNAV and ROEs.

CapitaLand marked its return to Singapore’s residential market by acquiring the iconic Pearl Bank Apartments for SGD728m. Including the estimated lease top-up premium of SGD201.4m for a fresh 99 year lease, the redevelopment site will cost a reasonable land rate of SGD1,515 psf ppr.
We view this deal positively as it addresses the lack of development pipeline in Singapore and will allow CapitaLand to capitalise on its strengthening residential market. Assuming an eventual ASP of SGD2,300 psf, we estimate a RNAV surplus of c.3cts per share for this deal.

CapitaLand realised SGD208m of portfolio gains in 2017 by divesting SGD2.6b of assets.
Management has set a target to recycle SGD3b of investment properties annually and aims to achieve a similar run-rate of gains. Assuming SGD200m of portfolio gains a year, successful implementation of this strategy could add another 1ppt to our ROE forecasts.

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.

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/ 2018-02-13

Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 4.10 Up 3.750