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


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

  • CapitaLand's 4Q19 operating PATMI surged 95.7%.
  • Maintained DPS at 12 S cents.
  • Net gearing ratio declined to 0.63x; meeting its target a year ahead of time.

FY19 results beat our expectations

  • 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.

Keeping to its annual divestments target of S$3b; seeking non-cyclical investment opportunities

  • 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.

Near-term impact from COVID-19 inevitable

  • 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