CapitaLand - DBS Research 2018-02-14: Back With A “Bank”

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CAPITALAND LIMITED C31.SI

CapitaLand - Back With A “Bank”

• CapitaLand's FY17F results in line; most business units firing ahead.
• S$3.8bn in pre-sales to be recognised in FY18F-19F, offering strong income visibility.
• Re-entering Singapore residential market with the successful en bloc of Pearl Bank Apartments.
• Maintain BUY, Target Price S$4.35.

Maintain BUY and Target Price of S$4.35. 

• We continue to see value in CapitaLand Limited (CAPL) as we anticipate strong catalysts in the medium term to drive its share price higher. 
• A 20% increase in dividend payment in FY17, which is sustainable, provides investors with confidence that all business units are on an uptrend. The stock remains attractive at 0.8x P/NAV compared to sector’s average of 0.9x.

Where we differ: Further potential for higher dividends which will surprise investors. 

• FY17F results are in line, driven by stronger recurring income from the group’s investment portfolio, given improving business fundamentals while a 20% hike in dividends (DPS) is a nice surprise. In fact, we believe that the group can sustain a further dividend hike in 2018, on the back of
  1. gains from sale of 20 retail malls to be completed in 1H18, and
  2. improving operational performance for recently completed retail malls. 
• Unrecognised revenues of close to S$3.8bn (China and Vietnam) offer strong income visibility. Thus, in view of stronger operational results come FY18F, we believe that our above-consensus-average target price of close to 1x forward P/NAV is achievable.

Peal Bank Apartments en bloc – a luxury development to rival the Wallich? 

• CapitaLand has successfully acquired the centrally located Pearl Bank Apartments through a private treaty collective sale for S$728m, with potential lease top up premium of S$201.4m. At a land price of S$1,515 psf, we believe that it is an attractive rate for a centrally located site, amidst the bullish bids seen in en blocs and in the GLS. 
• With an estimated breakeven at c.S$1,900, we believe that CapitaLand might look to launch a luxury project that could aim to rival that of Wallich (selling price of S$3,000) come 2H19.

Valuation

• Our target price of S$4.35 is based on a 10% discount to our adjusted RNAV of S$4.81/share.

Key Risks to Our View

• Slowdown in Asian economies. The risk to our view is if there is a slowdown in Asian economies, especially China, which could dampen demand for housing and private consumption.

WHAT’S NEW - Strong end to 2017

CapitaLand Limited : 4Q17 results 

• CapitaLand (CAPL) reported a good set of results, in line with expectations; dividend surprises on the upside to 12 Scts (consensus of 10-11 Scts). 
• On an FY17 basis, revenue dipped 13% y-o-y to S$4.6bn but PATMI reached a multi-year high at S$1,550.7m. FY17 Operating PATMI increased 5.0% to S$908.3m on the back of higher contribution from development projects in Singapore, one-off gains of S$160.9m from sale of The Nassim and an expanded retail portfolio in China. Markets of Singapore and China contributed c.77.3% of group revenue.
• On the back of strong operating PATMI, the group's proposed dividend of 12 Scts per share is higher by 20% y-o-y, which is above consensus expectations.

Operational Drivers for FY17F 

Better prospects for all. 

• Most business segments are showing stronger business prospects and the forward guidance is generally positive. Top line in FY17 declined mainly due to lower completion and handover units in China, partially mitigated by rental contribution from newly acquired properties and consolidation of revenues from CMT, CRCT, and RCS Trust (RCST).
• Major contributors were Summit Era Ningbo, One iPark in Shenshen, Century Park West in Chengdu, The Beaufort in Beijing and International Trade Centre in Tianjin.

Residential sales momentum to pick up; S$3.8bn in lock-in residential sales to be recognised in FY18F-19F.

• The group recorded lower sales on the back of a reduced launched pipeline but saw strong sell-through rates of 93% of launched units. 
• Looking ahead, CapitaLand group have a further 8,000 units worth RMB14.7bn (c.S$3bn) to be handed over and recognised in 2018- 2019. About 70% of the value is expected to be recognised in 2018. The group will also be looking to launch over 6,000 units in FY18 which will add to its income visibility.
• CapitaLand’s residential projects in Vietnam are also seeing strong take-up rates (92% of launched units have been sold) and will be handing over close to 2,800 units (valued at S$718m) in FY18F, of which 44% will be recognised in FY18F.

Retail portfolio seeing steady returns. 

• Retail portfolio is also seeing improvement with tenant sales in Singapore and China increasing by 1.5% and 19.8% respectively. Portfolio tenant sales and traffic growth were generally positive across the portfolio. 
• In China, we saw a 3.9% higher recurring income across the group’s China portfolio (Tier 1) and significant improvement in yield from the group’s China Tier 2 city malls (18.9%). The stabilisation of the newly completed malls in 2018 will underpin higher cashflows from 2018 onwards.

Ascott group – strong growth in units. 

• Ascott Group achieved 80,000 units under management and is targeting to double its global portfolio by 2023.

Outlook.

There is scope for further dividend hikes in FY18F. 

• In view of the improvement in operating cashflows and capital deployment opportunities, management believes that the 12 Scts declared in FY17F is sustainable and we see further scope for higher dividends in FY18F underpinned by the completion of major Raffles City projects and malls in China. 
• In addition, recurring income is expected to grow further given the accelerating pace of Ascott's growing presence and units under management.

Targets to grow AUM to S$100bn. 

• The group targets a S$100bn AUM by 2020 (from S$88.8bn in AUM under management as of 4Q17) and is looking at opportunities within its listed REITs, funds and potentially in the M&A space. 
• With gearing remaining conservative at 41% net debt/equity, this offers debt-funded headroom of S$4.9bn to a net debt/equity ratio of 0.64x.

Pearl Bank Apartment en bloc : We are back! 

• In a signal that the group is back in the Singapore residential game, CapitaLand announced that it has secured Pearl Bank Apartments through a private treaty exercise for S$728m. Inclusive of a premium of S$201.4m paid to top-up the land lease back to 99-year LH, the estimated capital commitment is close to S$929m to acquire the site. This translates into a total land price of S$1,515 psf. We estimate that breakeven could be close to S$2,000 psf, meaning that selling prices could be close to S$2,200 psf S$2,300 psf or even higher, depending on the product.
• CapitaLand's plans to build a new iconic 800-unit residential on site which is atop a hill could mean that a potential luxury condominium could re-emerge to rival Wallich Residences, which is asking close to S$3,000 psf.
• Given the significant size of the deal, timing of the launch is important and the group could look to launch the project in 2H19, after existing en-bloc projects have been launched for sale. A good sales momentum in the Singapore residential segment will bode well for the group. The location in Outram could potentially attract investors, and homebuyers who are keen to stay close to their work place in the city centre.
• With land prices rising amidst the en-bloc fever, we take comfort that CapitaLand has chosen to set foot closer to town at the Central Business District (CBD). The transaction price is lower than recent sites won in the vicinity (Jiak Kim Site at S$1,733 psf) , Stirling Road at S$1,050 psf and en-bloc deals: Mayfair Gardens (S$1,240 psf) and Nomanton Park (S$1,345 psf) which are priced marginally lower but are located further away from the CBD.

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2018-02-14

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.350 Same 4.350