CapitaLand - OCBC Investment 2020-02-27: Near-Term Uncertainties, But Planting Seeds For The Future

CAPITALAND LIMITED (SGX:C31)

CapitaLand - Near-Term Uncertainties, But Planting Seeds For The Future

CapitaLand (SGX:C31)’s FY19 results exceeded our expectations. Revenue and EBIT rose 11.3% and 22.3% to S$6,234.8m and S$5,067.6m, respectively. PATMI jumped 21.2% to S$2,135.9m; while operating PATMI (stripping out revaluation gains/impairments and portfolio/realised fair value gains) also grew 21.2% to S$1,057.2m. This was 14.6% above our forecast, and was also the highest ever operating PATMI reported by CapitaLand.
For 4Q19, operating PATMI surged 95.7% y-o-y to S$418.3m.
A first and final dividend of 12 S cents per share was declared, similar to FY18 despite the increase in the group’s operating PATMI.
CapitaLand highlighted that it prefers to adopt a prudent approach in light of the uncertainties over the extent and duration of COVID-19.

In FY19, CapitaLand recorded S$5.9b of gross divestments, which was 48% higher than FY18. As such, it was able to bring its net gearing ratio down to 0.63x (as at 31 Dec 2019), a year ahead of its original target of 0.64x by end-2020.
CapitaLand’s robust capital recycling activities also resulted in ROE of 10% for FY19 (FY18: 9.3%).
Looking ahead, management has maintained its annual divestments target of S$3b, and will seek non-cyclical investment opportunities. Although no details were given, we believe student accommodations could be one asset class which CapitaLand is exploring.

Operationally, management highlighted that 12 of its malls in China were closed, with four in Wuhan. Shopper traffic plunged by as much as 80-90% in China, but has now rebounded to ~40-50% of the pre-COVID-19 levels.
In Singapore, footfall dipped ~50% for its malls during the weekend after DORSCON was raised to Orange, but has now moderated to a 5% decline instead. Management announced a number of relief packages to support its mall tenants. This will have a near-term impact on its margins, in our view, but will go a long way in establishing stronger relationships with its tenants in the long run.
For CapitaLand’s Lodging business, occupancy in Singapore has hovered around 70%, above industry levels due to its more defensive longer-stay business model; in China, occupancy for its hospitality assets in Tier-1 cities are also around the 70% level, but was weaker at 40% for the rest of its portfolio in the lower tier cities.
Given the near-term uncertainties and negative impact from the COVID-19 situation, we widen our RNAV discount to 20% from 15%. As such, we derive a lower fair value of S$4.24 (previously S$4.42).
See CapitaLand Share Price; CapitaLand Target Price; CapitaLand Analyst Reports; CapitaLand Dividend History; CapitaLand Announcements; CapitaLand Latest News.
Notwithstanding our reduced fair value, we opine that CapitaLand is still trading at an attractive FY20F P/RNAV and P/B of 0.69x and 0.75x, respectively, as at the closing price on 26 Feb 2020.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-02-27

SGX Stock Analyst Report BUY MAINTAIN BUY 4.24 DOWN 4.420