Capital World - Tayrona Financial 2018-10-31: Improving Fundamentals Justify Rerating


Capital World - Improving Fundamentals Justify Rerating

Achieved major milestone with mall opening.

  • Capital World opened its flagship Capital 21 mall on 17 October. Following this critical milestone, Capital World is no longer a new developer, but a mall owner and developer with operating and cash flow generating assets.
  • We visited the mall and found the crowd to be encouraging with the mall reportedly being packed during its first weekend. Tenants are still moving in, but the tenancy has been said to be around 70%, including space occupied by its theme park.

New store openings and Movie Planet to lure crowds in 2019.

  • The Capital 21 mall opening is the latest of recent events in relation to Capital World’s flagship project. The mall obtained Certificate of Completion and Compliance in May and opened its doors to visitors to its indoor circus in August.
  • We envisage that the number of visitors will likely grow as more tenants move in. The launch of the theme park Movie Planet will also draw visitors in 2019.

Successful mall to spur more than RM450m of new sales.

  • Another synergy of opening the mall is that the subsequent increase in human traffic will raise the attractiveness of Phase 2 of Capital City to investors and potentially spur RM450m of new sales for the group.
  • We estimate the serviced suites and serviced apartments of Phase 2 to have a gross development value of RM455.93m.

Key risks.

  • We are mindful that the group’s current liabilities were more than its current assets as at end FY18. However, part of the group’s liabilities was deferred revenue for billings in advance of work completed and deferred land payments that are tied to the group’s cash flows from sales. These liabilities are not repayable on demand.
  • On an adjusted basis, the group has positive net current assets of RM95.42m.
  • The mall opening also helps the group to obtain financing, as banks will be more likely to accept operating assets as collateral. To diversify its risks, the group will also be launching a mass market landed housing project in the growing Pengerang area.

Compelling upside of almost 300%.

  • We value Capital World’s share of the mall and the theme park at RM600.84m or RM891.87 per sq. ft. of net saleable area. This valuation represents a steep discount of more than 50% from realized selling prices.
  • Including Phase 2 and profits from the sold units, we value the group at S$211m or S$0.147 per share (enlarged share capital of 1.44 billion shares). Hence, the potential return is significant, excluding upside from the Pengerang project and other projects in the pipeline.
  • Capital World’s share price fell sharply in 2017 and 2018, which could have been partly due to earlier shareholders selling out amidst poor trading liquidity. With improving fundamentals, we reckon that the Capital World’s share price has bottomed and rate Capital World Overweight with a high return and high-average risk view.

-- Updated on 2018-11-03 to include the section on 'Recommendation'.
-- Refer to the 31-page PDF report attached for complete analysis and details on valuation. 


Deserves credit for achieving major milestone.

  • Ultimately, we like Capital World for its execution from listing to-date. Capital 21, itself, is an ambitious project for a company the size of Capital World. Nonetheless, the management has, over the years, repositioned the mall into a theme park/entertainment destination, and successfully opened the mall and attracted visitors.

Hands-on management.

  • We also like Capital World for its hands-on management. Its offices are located right next to Capital City. While Capital 21 suffered from some negative feedback regarding e.g. the dustiness of its carpark, the management has since acted on these feedback.
  • We also highlight that the CEO of the group Mr Siow is an award-winning architect who has worked with various Malaysian developers such as KSL Holdings, Mah Sing Group etc. Hence, the group has experience in developing and managing integrated developments.

High upside potential.

  • While critics may assert that Capital World lacks scale with only one key project, the company is currently priced modestly, at a market capitalisation of S$48.7m, whereas Capital City has an overall gross development value of RM1.78 billion. In fact, we value the group at S$211m, suggesting attractive upside of almost 300%.
  • What has depressed Capital World’s share price has been the combined effect of poor liquidity, selling by initial investors and negative sentiment against Malaysian developers.

Comparatively undervalued.

  • Our peer comparison suggests that Capital World’s return on equity is superior to that of its peers in Malaysia. However, the group continues to trade at a discount to net tangible assets per share.
  • We argue that the group deserves to be rerated given the size and execution of its flagship project. Our valuation prices the group at 3.05 times net tangible assets per share.

Overweight with high return and high-average risk view.

  • On balance, we rate Capital World Overweight with a high return and high-average risk view. The high-average risk view reflects the group’s weak balance sheet.
  • Given that the group’s auditor has flagged material uncertainty about its ability to continue as a going concern, we do not find a lower risk rating justified. That said, we do not see Capital World as a high-risk prospect as much of the downside has been factored into its share price.

Liu Jinshu Tayrona Financial Research | http://www.tayronafinancial.com/ 2018-10-31