CapitaLand - DBS Research 2019-02-21: Profits Hitting Decade High


CapitaLand - Profits Hitting Decade High

  • CapitaLand's FY20 PATMI to hit decade high.
  • Strong income visibility with more than RMB15.7bn in presales to be recognised from FY19 onwards.
  • Operating metrics for retail malls and Ascott remain positive.
  • EGM's approval of merger with Ascendas-Singbridge; upside which we have not priced in.

What’s New - Best returns in a decade

FY18 PATMI ahead as growth engines chime in sync:

  • CapitaLand Limited (SGX:C31) reported a profit after tax and minority interest (PATMI) of S$1,762.5m, a 12.3% growth y-o-y and a new high since 2008. This was mainly driven by higher operating PATMI of S$872m (49% of PATMI) and portfolio gains (S$349m, 20% of PATMI) and revaluations of S$542m (31% of PATIMI).
  • The stronger performance was contributed mainly from higher revenues in China and Vietnam due to higher handovers, coupled with stronger recurring income from its investment portfolio.
  • The board is proposing a 12-Sct dividend per share which is similar to a year ago.
  • In 4Q18, CapitaLand's top line and EBIT grew by 34% and 52% respectively to S$1,624.5m and S$1,132.2m, largely due to higher handovers of units from China (Vermont Hills, New Horizon and Century Park East) and Vietnam, as well as newly acquired properties over the year in Singapore, China, Germany and the US.

Hitting a high ROE of 9.3%.

  • Building on the improving fundamentals seen across its business segments, CapitaLand hit a ROE of 9.3% in FY18, of which 4.6% is backed by operating PATMI, 2.9% from its asset revaluations and the remaining 1.8% from its gains on sale.

Targeting a balance between EM and DM exposures.

  • Management previously articulated a strategy to maintain a 50%-50% exposure to developed markets (DM) and emerging markets (EM) and had met that in FY18. This balance will offer the group the right balance to better ride through market uncertainties and cycles. This will change further assuming the completion of the merger with Ascendas-Singbridge.
  • CapitaLand has 58% of its exposure in DM (as of 4Q18).

A net investor in capital.

  • CapitaLand is a net investor of S$2.1bn into growing its AUM, deploying closer to S$6.1bn and divesting S$4.0bn.
  • The most recent acquisitions are mainly in China – investing S$131.3m into a 75% stake in a mixed-use site in Guangzhou – a 4.7-hectare site in Huangpu District is located within Guangzhou Science City, a government-backed innovation and technology hub.
  • CapitaLand has also invested in a 50% stake in a third Raffles City project in North Bund, Shanghai for c.S$1.27bn (CapitaLand's effective share). The property value for the project is estimated to be RMB19.5bn (S$3.87bn). Completing in phases over 2019 (office towers) to 2020 (retail podium), the group expects the project to fully contribute to earnings by 2021.

Balance sheet metrics remained stable with net debt/equity inching higher to 0.56x as of FY18 (vs 0.49x in FY17).

  • Net debt/assets increased marginally to 0.31x from 0.28x. On the back of stronger income, the NTA/share increased by 5% to S$4.40 from S$4.20. CapitaLand has fixed 74% of its debt which would somewhat shield it from fluctuations in interest rates.

Segmental performance:

Singapore: Pearl Bank Apartment (Singapore) and Sengkang Central to be launched in 2019.

  • Singapore residential sales dipped to 99 units in FY18 (eight units in 4Q18) with a sales value of S$371m (S$33m in 4Q18) as most of its properties in Singapore remain substantially sold (ranging from 93- 100%). Unsold inventories remain low and are mainly at Marine Blue (nine units) Sky Habitat. We look forward to the launch of the former Pearl Bank Apartments in 2019.
  • While the recent cooling measures are likely to put a dent on potential investor demand, the unique attributes of the project, coupled with its location close to the central business district (CBD), might attract buyers if priced well. We estimate a breakeven of S$2,200-2,300 psf.
  • In addition, the launch of a mixed-use development in Sengkang Central (50%-50% JV with City Developments Limited (SGX:C09)) will offer an additional 700 units of residential land bank for the group in Singapore.

Strong pre-sales to be recognised in China.

  • CapitaLand has been active in China, adding to its land bank (RMB882m for a 75% stake in a 4.7-hectare greenfield in Guangzhou, and RMB409m for two sites in Guangzhou). Handovers increased to 6,857 units (sales value of RMB11.0bn) which is a slight dip y-o-y. Sales in FY18 dipped to 4,938 units (sales value of RMB12.5bn), lower mainly due to the group holding back launches and having a lower number of inventories for sale.
  • Looking ahead, CapitaLand has another RMB15.6bn to be recognised from 2019 onwards with another 7,000 units to be launched for sale, adding to its pre-sold revenues.

Healthy metrics for retail business.

  • CapitaLand's retail mall business continue to gain traction with FY18 tenant sales growing by 1.6% in Singapore and 23.2% in China. The group reported steady same-mall NPI growth of 1.7% and 5.3% in Singapore and China respectively. We note that the respective figures for its malls in Malaysia and Japan remained weak, falling by 6.6% and 2.3% respectively.
  • Also, tenant sales (psf basis) are growing steadily at 1.3% and 4.0% for its Singapore and China malls while that for Malaysia and Japan grew by 8.6% and 0.7% respectively.
  • The latest malls that opened for business in China – CapitaMall Tiangongyuan Beijing and CapitaMall ONE Changsha – saw strong committed occupancy rates of 97% and 95% respectively.

Ascott to grow steadily.

  • Overall RevPAU rose by 4.0% y-o-y mainly from its properties in Singapore (+11%), China (+5%) and Europe (+12%) which more than offset the declines suffered by countries in Southeast Asia (-4%) and Gulf region & India (-10%).
  • Ascott still aims to grow its units under management from 100,000 to 160,000 by 2023.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-02-21
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