CapitaLand - RHB Invest 2018-02-14: Making A Comeback

CapitaLand - RHB Invest 2018-02-14: Making A Comeback CAPITALAND LIMITED C31.SI

CapitaLand - Making A Comeback

  • CapitaLand marked its return to the Singapore residential market with a reasonably priced acquisition of PBA. Management would continue its efforts in active portfolio reconstitution, which helped it to achieve its ROE target of 8%. 
  • Recurring income is set to receive a boost from the opening of eight retail malls in 2017 and higher fee income from its asset light strategies. 
  • Valuation remains attractive with the stock currently trading at a steep 30% discount to RNAV, besides offering a decent dividend yield of 3.7%. 
  • Maintain BUY with a Target Price of SGD 4.20 (19% upside).

Back in SG residential market after a hiatus. 

  • The acquisition of Pearl Bank Apartments (PBA) via a private treaty collective sale for SGD728m, marks a comeback after a four-year hiatus. The land cost (including a lease top-up premium of SGD201.4m) works out to SGD1,515 psf/GFA. 
  • We estimate the overall breakeven cost of ~SGD2,050 psf and average selling price of ~SGD2,250 psf. The acquisition looks well-timed and reasonably priced in our view considering the current intense competition for residential land parcels. 
  • We expect a healthy demand due to a limited new supply in the Outram Park area, excellent connectivity (at the doorstep of Outram Park MRT station) and good location attributes. 
  • Management noted it is seeing a clear pick-up in demand for its existing launches and would continue to bid prudently for well located sites.

Active portfolio reconstitution to boost ROE. 

  • Management outlined its strategy to actively reconstitute its portfolio going forward by unlocking value from mature/non-core assets and boost its return on equity (ROE). It targets to recycle SGD3bn pa of investment properties annually and re-deploy the capital in higher yielding assets. 
  • The active capital recycling strategy largely helped CapitaLand in achieving its ROE targets of 8-12% for FY17 (ROE: 8.5%), of which returns from its core operations accounted for nearly two-thirds.

Positive on China outlook. 

  • Despite property cooling measures, CapitaLand remains cautiously optimistic on the China market. The earnings visibility from China’s residential segment looks bright with CNY14.7bn of unbilled sales of which 70% of the earnings are expected to be recognised this year. 
  • The group also has > 6,000 units, which would be launched in 2018. On the retail front, its China malls (same-store basis) registered healthy NPI growth of 8.6%, backed by tenant sales growth (+7%YoY) and higher shopper traffic (+1.3%).

Other key updates. 

  • Management sees Vietnam (2% of current AUM) as a potential growth market and plans to further scale-up its presence in residential and commercial segments. 
  • Ascott would be another key growth engine as it plans to double its portfolio size to 160,000 units in the next five years. 
  • Much of this growth is expected to be via an asset light model (management contract), which would help to boost the scale-up of its global presence and also returns.

Maintain BUY with an unchanged Target Price of SGD4.20, based on a 15% discount to our RNAV estimates of SGD 4.94/share. 

  • We have fine-tuned our FY18F-19F earnings by +/-1%. 
  • Key re-rating catalysts ahead are more acquisitions in Singapore residential market, building of recurring income from via an asset light model and unlocking of value through divestments.

Operations And Results Review 

Portfolio gearing inched up to 49%, up from 43% as at 3Q17. 

  • Management guided that it has a debt headroom of ~SGD5bn for acquisitions assuming a comfortable gearing level of 0.64x. 
  • Overall implied interest cost remain low at 3.2% (2016: 3.3%) with average debt maturity of 3.3 years. About 72% of its debt is currently fixed.

Revaluation and portfolio gains. 

  • For FY17, CapitaLand recorded portfolio gains of SGD208.3m (+652% y-o-y) mainly from the divestments of Innov Tower in China and Zenith Residences in Japan, investments in Vietnam and re-measurement gains from CapitaLand Mall Trust consolidation. 
  • The group also recorded revaluation gains of SGD434.1m on the back of a higher value for its investment properties.

FY17 core PATMI slightly below expectations. 

  • FY17 core PATMI of SGD908.3m accounted for 91% of our full-year forecasts. The shortfall was mainly due to the lower than expected handover of units in China projects during the fourth quarter. Singapore and China markets remain the key EBIT drivers, accounting for 88% of total EBIT for FY17.
  • CapitaLand declared a final dividend of SGD0.12 for 2017, a 20% increase over last year.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-14
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 4.200 Same 4.200