CapitaLand - Maybank Kim Eng 2018-09-18: Venturing Into New Asset Class

CAPITALAND LIMITED (SGX:C31) | SGinvestors.io CAPITALAND LIMITED SGX:C31

CapitaLand - Venturing Into New Asset Class


Maintain BUY; Target Price SGD3.80

  • CapitaLand is acquiring 16 multi-family properties in the US. This is a new asset class for the group and is part of its pursuit of new businesses and income streams.
  • We see the acquisition as a relatively low-risk proposition with stable income that could be enhanced with active management.
  • We keep forecasts unchanged pending deal completion. Maintain BUY and SGD3.80 Target Price, at a 30% discount to RNAV.



Putting a billion dollars to work

  • Acquired for USD835m or SGD1.14b, these suburban Class B properties are located in Seattle, Portland, Greater Los Angeles and Denver. The acquisition price is in line with CBRE’s valuation of SGD845m. They have a total of 3,787 units with average occupancy of over 90%. Leases are typically signed for one year with 50-60% retention rates. Average length of stay is two years.
  • CapitaLand expects to continue investing in the deep multi-family market in the US worth over USD3.3t and sees potential for a separate spinoff in the future.


~ SGinvestors.io ~ Where SG investors share

Accretion from positive carry & enhancements

  • Management guides that the portfolio has cap rates that are close to market levels of 5.0-5.5%. The purchase will be fully funded by USD debt to hedge FX risks. 
  • ~ SGinvestors.io ~ Where SG investors share
  • While property yields have a small spread over its 4% funding cost, management sees the potential for rental uplifts with asset enhancement. It expects to spend about USD50m over the next 2-3 years on enhancement.
  • Overall, it sees 1.4% EPS accretion, based on 2017 pro-forma earnings. Prospective returns are expected to track historical levels of close to 10% pa.


Initial remarks from new CEO

  • Separately, newly-appointed CEO Mr Lee Chee Koon addressed the sell-side community for the first time. He flagged three focuses for the group.
    • Firstly, he aims to step up capital recycling to enhance returns. Various recently completed projects are potential candidates.
    • Secondly, he wants to increase its development pipeline and work towards a 20:80 split between trading and investment properties.
    • Lastly, he aims to lift fee income.


Swing Factors 


Upside 

  • 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. 

Downside 

  • 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 Research | https://www.maybank-ke.com.sg/ 2018-09-18
SGX Stock Analyst Report BUY Maintain BUY 3.800 Same 3.800



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