CapitaLand - DBS Research 2018-07-06: Timely Re-entry With Attractive Yield

CapitaLand - DBS Vickers 2018-07-06: Timely Re-entry With Attractive Yield CAPITALAND LIMITED SGX: C31

CapitaLand - Timely Re-entry With Attractive Yield

  • Singapore residential curbs to have limited impact on CapitaLand’s financials.
  • Residential book substantially sold, growing earnings from its commercial portfolio to underpin potential higher dividends.
  • BUY call maintained, Target Price reduced to S$3.62. 



Maintain BUY, Target Price reduced to S$3.62.

  • With the re-introduction of property measures in Singapore, we see limited impact on CapitaLand Limited (CAPL) given that the group has substantially sold off existing inventories and the Singapore residential exposure forms only 5% of RNAV. 
  • Strong upcoming 2Q18 results on the back of growing income from its commercial property portfolios from China and Singapore will be re-rating catalysts.


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

  • We continue to see value in CapitaLand 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.
  • We potentially see further dividend upside for the group given the strong pipeline of launch projects in the wings.


Pearl Bank Apartments en-bloc – ample buffers.

  • CapitaLand successfully acquired the centrally located Pearl Bank Apartments through a private treaty collective sale for S$728m, implying a land price of S$1,515 psf, which we believe is an attractive rate for a centrally located site.
  • While the property curbs will be an overhang for the potential sale price to be achieved for the site, with an estimated breakeven at c.S$1,900, we believe there are ample buffers for the group to achieve a decent margin.


Valuation:

  • Our target price is revised downwards to S$3.62 is based on a 25% discount (from 10% previously) 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.


CRITICAL DATA POINTS TO WATCH


Growing recurring revenues from retail mall portfolio and Ascott.

  • While trading properties (residential development and strata offices) account for 24% of assets, we see continued strength from CMA (CapitaLand’s retail mall division) and commercial integrated developments, including Ascott Group (its successful serviced residence brand) which form a significant 76% of total assets and are expected to contribute to growing recurring income for the group.

Retail malls seeing good tenant sales growth, operational outlook remains stable.

  • The group’s retail malls in China, Singapore and Malaysia are seeing improving operating metrics - tenant sales in Singapore and China have increased by 1.5% and 19.8% respectively, while portfolio tenant sales and traffic growth were generally positive across the portfolio. 
  • Looking ahead, we expect the CMA to drive earnings mainly on the back of the stabilisation of more than 1m sqm of retail space that was completed back in 2017.

Asset reconstitution strategy to crystalise value.

  • The proposed sale of 20 malls, of which mostly are in Tier 2/3 cities at 7% premium above valuation, crystalises value for investors and is a testament of the group’s proactive asset management capabilities. Income lost will be more than compensated by the completion of more than 1m sqm of retail GFA in 2017, a majority coming from China (Suzhou Center Mall) and three Raffles City projects (Raffles City Changning, Raffles City Hangzhou and Raffles City Shenzhen) which have seen strong pre-leasing interest with committed rates of more than 90%.
  • The Ascott Limited remains on the fast track to achieve its 80,000-unit target by year 2020 and now aims to double it by 2023. With scale, we believe that Ascott can achieve better operating efficiency and thus margins and returns. Ascott’s investment in China’s largest and fastest-growing online apartment sharing platform, Tujia has yet to bear fruit meaningfully but we continue to believe in its longer-term synergies and ability to leverage on Tujia’s platform to reach out to a wider addressable market in the medium term.

Residential sales see strong uplift as property market sentiment improves.

  • CapitaLand continues to see strong momentum in its residential division in China.
  • In Singapore, the group has successfully added to its land bank through the en-bloc of Pearl Bank Apartments which will be launched in 2019 but could be delayed given the property curbs.
  • In China, the group has locked in c.$3.0bn in sales offering strong earnings visibility. In 2018, CapitaLand will be launching a further 6,000 units for sale.


Balance Sheet:

  • Balance sheet remains strong. We forecast debt/equity ratio to remain stable, at below c.0.6x in the coming years. 
  • Debt maturity profile remains long at 3.0 years with an average cost of 3.4%. The group aims to maintain a higher level of interest cost hedged.


Share Price Drivers:


Strong residential sales to translate into higher prices.

  • CapitaLand has taken advantage of the improved property sentiment in Singapore to sell most of its existing inventory. 
  • Key will be potential land-banking opportunities to replenish its balance sheet. In addition, strong sales in China, we believe, will result in higher prices.

M&A and acquisitions.

  • CapitaLand is looking at opportunities across the region and with the strong residential sales recorded in recent years across Singapore, China and Vietnam, it makes sense to be replenishing land banks in these countries.
  • Acknowledging strong competition for land, management is looking at opportunities to acquire land through JVs or mergers & acquisitions (M&A) which will offer the group an alternative and cheaper entry price. The group remains keen to build on its recurring income base and we could see acquisitions in that space.

Asset recycling into listed S-REITs/ funds.

  • CapitaLand will continue to demonstrate its ability to crystallise value through strategic divestments of mature assets to its listed REITs, which are market leaders in their respective subsectors of retail, office and hospitality. 
  • The ability to recycle capital efficiently will enable the group to free up capital, improve its balance sheet position and deploy capital to projects with higher returns.


Key Risks:

  • Slowdown in Asian economies. The risk to our view is a further slowdown in Asian economies which could dampen demand for housing and private consumption expenditure and retail sales. This could, in turn, result in slower-than-expected projections.







Derek TAN DBS Vickers | Rachel TAN DBS Vickers | https://www.dbsvickers.com/ 2018-07-06
SGX Stock Analyst Report BUY Maintain BUY 3.62 Down 4.350



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