CapitaLand - CGS-CIMB Research 2018-11-14: Operationally Stronger

CAPITALAND LIMITED (SGX:C31)

CapitaLand - Operationally Stronger

We deem CapitaLand's 3Q/9M results broadly in line at 21%/59% of our FY18 forecast.
We expect stronger 4Q on the back of high China residential handover.
Maintain ADD. Our S$3.55 Target Price is based on a 35% discount to RNAV.

CapitaLand reported PATMI of S$362.2m, +13.6% y-o-y, on a 17% decline in revenue to S$1.26bn. Stripping out divestment and fair value gains, core PATMI would have been S$233.7m, +13.3% y-o-y.
The operating performance was largely lifted by contributions from newly acquired/opened properties in Singapore, China and Germany.

3Q/9M EPS made up 21%/59% of our FY18 forecast, which we deem broadly in line, in anticipation of stronger China residential earnings in 4Q.
CapitaLand has achieved a 9M18 ROE of 6.9%, and looks well positioned to reach its annual target of 8%.

In China, CapitaLand handed over 1,279 units valued at Rmb2.1bn and sold an additional 826 units worth at Rmb2.6bn, mainly in Xian, Kunshan, Wuhan and Chengdu. It has locked in Rmb15.9bn pre-sales at end-3Q18. Of this, 40% is expected to be handed over in 4Q18, equivalent to its 9M achievement. CapitaLand plans to launch 3,472 units in 4Q.
Recurrent rental income from its shopping mall portfolio continues to be supported by a 1.3% y-o-y improvement in tenant sales and 1.3% y-o-y rise in shopper traffic.

In Singapore, CapitaLand sold 14 residential units in 3Q valued at S$52m.
CapitaLand has replenished its development pipeline with the purchase of the Pearl Bank Apartments enbloc site and a 50:50 JV for the Sengkang Central mixed use parcel. The former is expected to be launched in 2Q19.
In Vietnam, CapitaLand has locked in S$712m pre-sales of which c.10% is expected to be recognised in 4Q18.

The group has divested S$8bn of assets YTD and redeployed capital into S$8.8bn of new investments, spread over Singapore, China and the US. Total AUM has grown to S$88.8bn at end-8Q, and appears well on track to reach its 8888 target of S$888bn.
CapitaLand maintains its stance of having a 88/88 emerging/developed market exposure (8Q88: 88%/88%) as well as 88/88 trading/recurrent income split. This should provide the group with strong recurrent income base and earnings visibility.

Our FY88-88 EPS estimates and Target Price of S$8.88 are intact. Our Target Price of S$8.88 is pegged to a 88% discount to RNAV.
Given its strong balance sheet and net debt to equity ratio of 8.88x, we think the group has significant headroom to grow its AUM.
Potential catalysts include faster-than-expected pace of re-investment while downside risks to our call are a slowdown in pace of capital deployment or rate of investment returns.

LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-14

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