CapitaLand - OCBC Investment 2019-05-03: Slow Start; Backend Loaded Year Awaits


CapitaLand - Slow Start; Backend Loaded Year Awaits

  • CapitaLand’s 1Q19 operating PATMI fell 20.5% y-o-y.
  • Higher handovers in 2H for China and Vietnam.
  • Raise Fair Value to S$4.04.

CapitaLand's 1Q19 results missed expectations

  • CAPITALAND LIMITED (SGX:C31)’s 1Q19 results missed ours and the street’s expectations. Revenue declined 23.8% y-o-y to S$1,048.3m due largely to lower contributions from its residential projects in Singapore and China, but partially offset by higher handover of residential units in Vietnam and inorganic growth.
  • PATMI fell 7.4% to S$295.6m. After adjusting for divestment gains/losses, revaluations and impairments, 1Q19 operating PATMI dipped 20.5% y-o-y to S$181.9m. This accounted for 18.6% and 16.5% of ours and Bloomberg consensus’ FY19 forecasts, respectively.

Expect stronger 2H for China and Vietnam

  • In 1Q19, CapitaLand handed over 328 residential units in China with a total value of RMB1.2b (- 37.6% y-o-y). Looking ahead, ~60% of the 7.8k units sold previously worth ~RMB17.2b are expected to be recognised from 2Q-4Q19. This would imply a backend loaded year for its Chinese residential operations.
  • Management noted that it has observed selective policy easing in the cities which it operates in. Price caps for projects are allowed to be lifted by ~2%-4% per quarter. Key demand drivers include the influx of talent into tier-1 and 2 cities, resulting in the need for more homes. However, policy changes remain as a major risk, as the politburo recently reiterated that “houses are used for living, not for speculation”.
  • In Vietnam, another of CapitaLand’s core market, management highlighted that its launch schedule will come in slower than originally anticipated, as a change in the regulatory environment has led to longer approval timelines for projects. Besides this, fundamentals in the market remain robust. ~31% of the S$732m of residential units sold previously are expected to be recognised from 2Q-4Q19.

Funds under management and capital recycling another key focus

  • We believe CapitaLand will also increase its focus on its funds management platform (recently raised US$556m for its first discretionary real estate debt fund in China) and continue its capital recycling activities to spur higher ROE for its shareholders. In 1Q19, S$485.6m of divestments were made, versus S$764.7m of investments.
  • After factoring in our revised fair value changes for the CapitaLand REITs under our coverage and market prices of CapitaLand’s listed entities, we derive a higher fair value estimate of S$4.04 (previously: S$3.98).
  • Maintain BUY.

Wong Teck Ching Andy CFA OCBC Investment Research | https://www.iocbc.com/ 2019-05-03
SGX Stock Analyst Report BUY MAINTAIN BUY 4.04 UP 3.980