CapitaLand (CAPL SP) - UOB Kay Hian 2018-08-10: 2Q18 Looking Good On Hindsight

CapitaLand (CAPL SP) - UOB Kay Hian Research 2018-08-10: 2q18 Looking Good On Hindsight CAPITALAND LIMITED SGX:C31

CapitaLand (CAPL SP) - 2Q18 Looking Good On Hindsight

  • Management sees Singapore residential slowing in 1H18 amid cooling measures. Due to its limited Singapore residential exposure, the group continues to be well- positioned to seek local and overseas expansion (and on track to grow its AUM to S$100b by 2020).
  • Amid cooling measures restricting price growth in China, the group has delayed some of its launches. Management also seeks to expand further in Vietnam (up to 10% capital allocation).
  • Maintain BUY with a lower target price of S$3.78.



2Q18 RESULTS


Results in line with expectations.

  • CapitaLand’s (CAPL) 2Q18 net profit of S$605.5m was up 4.4% y-o-y, mainly due to higher contributions from newly acquired and opened investment properties in Singapore, China and Germany, revaluation gains registered by its portfolio investment properties; but partially offset by lower portfolio gains and contribution from residential projects (from Singapore and China). Excluding exceptional items (gains from the sale of The Nassim), 1H18 operating net profit grew 8.8% y-o-y (or S$34.2m) on the back of higher recurring income from retail and commercial businesses, partially offset by lower contributions from development projects in Singapore and China.


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  • CapitaLand’s 2Q18 revenue grew 35.3% y-o-y to S$1,342m in 2Q18 on the back of higher handover of residential units in China, rental revenue from newly acquired/opened properties in Singapore, China and Germany, as well as consolidation of revenue from CapitaLand Mall Trust (SGX:C38U), CapitaLand Retail China Trust (SGX:AU8U), with expectations with 1H18 operating net senting 45.7% of our full-year estimate.
  • CapitaLand’s net gearing inched up to 0.50x (1Q18: 0.49x) with average debt maturity at 3.4 years (1Q18: 3.6 years). The group also maintained its proportion of fixed-rate financing high at 73% (flat q-o-q) in view of rising interest rates. The group’s NTA per share was S$4.39 as at end-Jun 18 (1Q18: S$4.38).


STOCK IMPACT


Group AUM on track to reach S$100b by 2020.

  • Management emphasised the importance of scale in their business, which allows them to invest in digitalisation to improve productivity and efficiency. During the quarter, total AUM expanded by S$2.1b to reach S$93.1b. Their targeted allocation is 50%/50% between emerging vs developed markets; and 20%/80% between trading properties vs investment properties.
  • Given the large proportion of capital in investment properties, management considers it imperative to step up the pace of capital recycling (which is opportunity-driven). In 1H18, the group made S$3.1b worth of divestments (surpassing its S$3b annual target) and deployed S$1.8b in new investments. 
  • CapitaLand has recycled non-core retail and commercial assets in China and Singapore, and invested into residential trading in respective markets. In developed markets, like Germany, the group has secured Grade A office, Gallileo, in Franfurt, which it sees will benefit from financial-sector tenants relocating from London (as a result of Brexit).

Singapore residential sales to moderate in 2H18 amid cooling measures.

  • Post-cooling measures, buyers’ purchasing ability are being affected by the increased additional buyers’ stamp duty rates and tightened loan-to-value limits. Pearl Bank has been issued the sales order on 1 Aug 18 (which will complete in three months post-sales issuance) and the new development is on track for launch in 1H19. 
  • On hindsight, management noted that they have been underweight on Singapore residential (based on risk-reward analysis), and their limited exposure puts them in strong position now for other opportunities.

Vietnam exposure may increase up to 10% (vs +2% in AUM as at 2Q18).

  • Management continues to like the macro-environment (young and growing middle class) in Vietnam but also noted that their capital market is not as developed. CapitaLand has been focusing primarily on residential space but plans on expanding to other segments, such as Grade A offices (serving the growing number of MNCs setting up in the country) as well as lodging platforms (outside of Hanoi and Ho Chi Minh City).

China residential sales to slow.

  • Due to cooling measures by the Chinese government in tier-1 and tier-2 cities to restrict growth of home prices, the group has delayed some launches. Sales of residential units have fallen to 746 units in 2Q18 (2Q17: 3,159 units). 
  • For 2H18, the group has 4,000 launch-ready units to be released (which will be timed according to market conditions). They also have about 8,000 units (valued at Rmb16.2b) which were sold but not handed over yet.

China’s heavy shopping mall pipeline.

  • Of the 13 properties that will open in 2018 and beyond, 10 are in China. Including properties in the pipeline, the number of Chinese malls in the portfolio is expected to increase to 51 (from 41 as at end-2Q18). In 2H18, CapitaLand expects to open CapitaMall LuOne shopping mall in Shanghai and CapitaMall Tiangongyuan in Beijing.
  • In 2Q18, NPI for malls increased in Singapore (+1.7%) and China (+7.2%), but declined in Malaysia (-5.0%) and Japan (-5.3%).

Focus markets.

  • Management seeks to deepen its footprint in the core markets of Singapore and China, but will look to expand further in Vietnam and Indonesia.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower target price of S$3.78, pegged at a 20% discount to our RNAV of S$4.73/share. 
  • We believe a wider discount is warranted, given the more challenging outlook amid cooling measures implemented in Singapore and China.


EARNINGS REVISION

  • We revise our 2018-20 net profit estimates by -3% to 0% after fine-tuning our earnings recognition from its residential projects in Singapore and China.


SHARE PRICE CATALYSTS

  • Improving sentiment in core markets Singapore and China.
  • Accretive M&A in building up AUM, and recurrent earnings.





Andrew CHOW CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-10
SGX Stock Analyst Report BUY Maintain BUY 3.78 Down 4.300



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