CapitaLand - DBS Research 2020-02-27: Take My Breath Away


CapitaLand - Take My Breath Away

  • We maintain our BUY call on CapitaLand with Target Price still at S$4.50 based on a 20% discount to revalued net asset value (RNAV) of S$5.62.
  • With a banner 2019 year behind us, we anticipate 2020 to be a year of growth with a renewed focus in establishing dominance in key markets of Singapore and China while looking at opportunities to deploy capital in growth markets of India and Vietnam.
  • Our Target Price implies a price (P)/forward NAV of 1.0x, pegged to historical 5-year +1 standard deviation (SD).

CapitaLand Group achieved ROE of 10% in 4Q/FY19:

Key metrics ahead of forecasts.

  • For FY20, CapitaLand (SGX:C31) reported a profit after tax and MI (PATMI) of S$2.1bn (up 21% y-o-y), ahead of our estimates.
  • Core operating PATMI came in at S$1.057bn, within our estimates. This is on the back of a 22.3% rise in EBIT to S$5.067bn, driven mainly by higher recurring income bases from the consolidation of Ascendas-Singbridge and Raffles City Chongqing, its malls and lodging business in the US.
  • Singapore and China accounted for 83.7% of EBIT for 2019.
  • ROE hit 10%, in line with management’s initial guidance and target.
  • Gearing has been lowered to 0.63x by end-FY19, ahead of initial estimates of end-FY20. If the group had de-consolidated its listed REITs, gearing would have been lower at 0.56x.
  • Dividend per share was maintained at 12 Scts, in line with estimates but may have disappointed some investors’ recent talks of a prospective dividend raise.
  • See CapitaLand Share Price; CapitaLand Target Price; CapitaLand Analyst Reports; CapitaLand Dividend History; CapitaLand Announcements; CapitaLand Latest News.

Key events to look out for in 2020.

COVID-19 impact: Affects various business units, especially in China but consumer “pent-up demand” could drive a rebound in 2H20.

  • China: Gradual return to normalcy.
    • Retail: For now, the impact is uncertain given the length of the disruption period in China and at this moment c.12 malls (including the mall at Raffles City Chongqing) across a number of the cities remain closed as instructed by the authorities while most of its malls are observing shorter operating hours. On that front, the group has been actively engaging tenants and providing support to maintain business viability. We understand that the businesses are returning to normalcy in China and selectively, foot traffic in their malls are c.40% of previous normal levels.
    • Residential: Jan-Feb 2020 sales numbers are likely to be weak as most show-flats are closed. However, we understand that re-opened most sales centre on 17 Feb 2020 which implies that sales should kick-start soon.
    • Office and Business Parks: Most of the companies have started to open (c.70% of tenants) but most of the tenants are running at half strength given ongoing business continuity plans (BCP) are in place.
    • Lodging: Occupancy rates are down but fairly strong at c.70% for Tier 1 cities and c.40% for other tier cities.
  • Singapore: Limited impact for now
    • Retail: Foot traffic has improved post 14 Feb 2020 and now stands roughly c.5% below pre-COVID-19 levels, indicating that the community is returning to normal.
    • Lodging: Affected but mitigated by the longer length-of-stay business. And 70-80% of the travels are corporate related and the elasticity of demand is less impacted for now.
  • Europe/US: Stable
    • Lodging: Bookings remain stable and less affected by the COVID-19 impact.

Residential pipeline

  • China – robust pipeline. CapitaLand sold 5,268 units in 2019, translating into RMB13.2bn of residential sales in 2019. Out of the launched units, 90% had been sold as of Dec 2019. We see good sell-through rates across its key clusters (Xi’an, Shenyang, Wuhan and Guangzhou) and the group has another c.7,000 units to be launched in 2020. In terms of handover units, the group has over RMB13.3bn worth of projects to be handed over from 2020 onwards, out of which 70% will be recognised in 2020.
  • Singapore – CapitaLand sold 501 units with a value of S$661m, income which will be recognised in the coming years.
  • Vietnam – Strong sell-through rates: Sell-through rate of 98% but the pipeline in Vietnam is tapering off. 2,200 units worth S$750m have been sold and will be recognised over the next two years. Given the strong sales momentum, the management is looking to add more land banks there when the opportunity arises.

Walking the talk: Management to take a pay cut.

  • Senior management and board to take a 5-15% pay cut in board fees and base salary, coupled with a wage freeze for all staff at managerial level and above. These measures are to be reviewed in FY20.

Asset recycling target in 2020.

  • Management remains confident of maintaining a S$3bn divestment target which will be a key driver to achieving a target ROE of c.9% in 2020-2021.
  • We remain on the watch for potential divestments of its Singapore Business Parks, Japan Commercial (retail and office) and potentially China retail assets (malls, office and Raffles City projects) to its listed REITs or other fund platforms.
  • There is also a possibility that the management may look to reduce its stakes in the Raffles City projects (in the funds) and we believe that if that happens, its REIT, CapitaLand Retail China Trust (SGX:AU8U) may stand to benefit.

Deployment of capital.

  • Deployment of investable capital. CapitaLand remains on a lookout for opportunities and remains keen to execute when such deals arise, even in China.
  • While small, the group acquired a Business Park (GBP129.3m or S$226.9m) in Reading, UK. The Business Park comprises 11 office buildings totalling 367,000 sqft. While no numbers are disclosed at this point, based on market transaction date, we estimate the net initial yield to be at mid-4% and hit a stabilised level of c.7% by 2021.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-02-27
SGX Stock Analyst Report BUY MAINTAIN BUY 4.500 SAME 4.500