CapitaLand - OCBC Investment 2018-12-05: Proactive Capital Recycling To Unlock Value


CapitaLand - Proactive Capital Recycling To Unlock Value

  • Bumper quarter from China in 4Q18.
  • Further stimulus measures expected in 2019.
  • On track to meet its ROE target.

Proactive capital recycling; expect bumper 4Q from China

  • We like CapitaLand for its proactive capital recycling initiatives to unlock value for its shareholders. Management has been productive on reconstituting its portfolio, having announced total investments of S$6.1b YTD. This has been partially balanced by divestments amounting to S$4.0b, which generated gains of S$288.7m.
  • Some of the investments include the acquisition of 16 freehold multifamily properties in the U.S. for S$1.14b, joint acquisition of its third Raffles City integrated development in Shanghai (21% effective stake) with GIC and two prime residential sites in Guangzhou.
  • Looking ahead, CapitaLand has close to 3.5k residential units which are ready to be released in China in 4Q18. It also expects to recognise ~RMB6.4b of revenue (100% basis) from China in 4Q18, which is significant given that 9M18 value recognised was RMB6.2b.

Further pleasant surprise from China to come?

  • Given CapitaLand’s significant exposure to the Chinese market, we believe it will benefit from the progress between the U.S. and China to ameliorate their trade differences.
  • While there are some concerns on whether an agreement can be struck, we believe the situation has improved as compared to a few months back. There is also growing optimism that China will look at further stimulus measures in 2019 to spur her economy.

On track to meet > 8% ROE target

  • Given CapitaLand’s active capital recycling strategy and continued efforts to boost the value of its properties, it generated ROE of 6.9% for 9M18 (annualised ~9.2%). This puts it well on track to deliver its annual ROE target of at least 8%.
  • CapitaLand’s balance sheet also remains strong, with a net gearing ratio of 0.51x.
  • Our fair value estimate on CapitaLand currently stands at S$3.96, which is based on a 20% RNAV discount applied.

Wong Teck Ching Andy CFA OCBC Investment Research | https://www.iocbc.com/ 2018-12-05
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