CapitaLand - UOB Kay Hian 2020-02-27: 2019 Solid Results, But COVID-19 Outbreak Remains A Concern

CAPITALAND LIMITED (SGX:C31)

CapitaLand - 2019 Solid Results, But COVID-19 Outbreak Remains A Concern

CapitaLand (SGX:C31) reported a decent set of numbers with a 21% y-o-y increase in NPAT to S$2.14b, but missed our and consensus numbers at the operating PATMI level if we exclude the ASB merger.
Impressively, CapitaLand generated a double-digit ROE for the first time in 10 years, and its gearing has been brought down below its targeted level ahead of time.

The COVID-19 outbreak remains a concern given its material exposure to Singapore and China retail.
Maintain HOLD. Target price: S$3.70. Entry price: S$3.50.

CapitaLand (SGX:C31) reported a decent set of numbers given the Ascendas-Singbridge (ASB) merger in 2019. Revenue grew 11% y-o-y to S$6.2b, generating a 21% y-o-y increase in NPAT to S$2.14b. The results were helped by revaluation gains that were largely performance driven (ie from higher NPI growth). In 4Q19, the top 10 assets accounted for c.72% of revaluation gains. NPI yield of these assets grew to 5.2% in 4Q19, from 4.8% in 4Q18. Revaluation gains of S$294m in 4Q19 can be attributed mainly to properties in Singapore, China, India, and Vietnam. The enlarged portfolio, comprising investment properties from ASB also contributed to higher fair value gains.
Excluding the ASB benefits, revenue declined 8% y-o-y to S$5.14b (beating our estimates but missing consensus numbers) while operating PATMI grew 2% y-o-y to S$1.06b, missing both our and consensus numbers.
Dividend payout of $0.12/share in 2019 (flat y-o-y), providing a dividend yield of 3.2%. This represents a dividend payout ratio of 40% (2018: 41%).
Record double-digit 10% ROE. ROE continued to exceed cost of equity for the third year, and represents the first double-digit ROE since 2010. The group’s net gearing has also been brought down to 0.63x at end-19 (ahead of its 0.64x target), providing it with S$13b in acquisition headroom from cash and available undrawn facilities.

As directed by the local authorities, CapitaLand closed 12 of their retail malls in China, of which four are located in Wuhan. CapitaLand noted that a number of its other China malls are partially closed with only the supermarket opened to provide daily necessities to the locals, while others operate on shorter hours to close at 8pm instead of usual 10pm. The group is also providing rental waivers (from 25 Jan–13 Feb 20) to its Wuhan malls, and 50% rental rebates (covering 25 Jan–9 Feb 20) for other China malls.
Management expects shopper traffic to rebound quickly when the situation improves, since most of their China malls cater to local demand and are less dependent on foreign visitors. The company believes that the negative impact on its China lodging business is mitigated by the fact that its average length of stay is longer vs its competitors, and 70% of its demand comes from corporates which has tighter elasticity of demand.

Management stated that it experienced a material initial drop-off in foot traffic at its Singapore malls, but as of last week, foot traffic had rebounded. CapitaLand stated that it is supporting its tenants by offering them the flexibility to operate shorter hours, and will pass on the full savings of the Government’s property tax rebate that was announced in the recent Singapore Budget 2020.
On the hospitality side, CapitaLand has seen reduced serviced-residence bookings due to lower visitor arrivals; however management believes the impact on its Singapore portfolio will be partially mitigated due to its longer stays and corporate focus. Occupancies at its Ascott Orchard and Ascott Raffles Place are still running at 70% occupancies which we view as very solid.

For 2019, handover value grew 12% y-o-y, despite a 21% y-o-y decline in units handed over due to the product mix. In terms of future recognition, given the 6,400 units sold, another Rmb14.4b is expected to be handed over from 2020 onwards. Of this, 70% of the value is expected to be recognised in 2020, subject to construction progress, which could potentially be delayed by the COVID-19 outbreak.

CapitaLand’s China residential sales grew by 5% and 7% y-o-y in value and units respectively in 2019, supported by strong broad-based demand across the company’s key city clusters. The group also achieved healthy sell-through rate for launches in 4Q19: La Botanica, Xi’an (98% sold at and average of Rmb11.6k psm), Lake Botanica, Shenyang (100% sold at Rmb6.0k psm), Lakeside, Wuhan (90% sold at Rmb9.0k psm), Citta Di Mare Phase 2, Guangzhou (74% sold at Rmb22.1k psm).
Although the impact of the COVID-19 outbreak on China residential sales will be material for Jan-Feb 20, given that show suites were closed, management noted that show suites have re-opened, and there has been transactions since then.

Senior management and board members will take 5-15% pay-cut to ‘share the pain’ with stakeholders, in terms of their base salary and board fees (effective from 1 Apr 20). A wage freeze has also been imposed for all staff at managerial level and above, and these measures will be reassessed after six months, or when the COVID-19 outbreak has stabilised.

We have upgraded our earnings estimates for 2020 and 2021 materially to take into account the full integration of the ASB merger into our numbers.
While earnings revision momentum has been positive for CapitaLand in the past few months as consensus has imputed the benefits of the merger, we do not believe that the full negative effect of COVID-19 outbreak has been taken into account yet.

Maintain HOLD with a slightly lower target price of S$3.70, pegged at a 20% discount to our revised RNAV of S$4.70/share.
While the company’s assets are high quality, and management has done a highly admirable and impressive job of lowering gearing while increasing ROE to double digits, we continue to be less enthused regarding CapitaLand’s exposure to Singapore and China retail.
In our view, the threat of e-commerce continues to loom large in the company’s rear-view mirror, and the COVID-19 outbreak may have accelerated consumers to transact more online.
See CapitaLand Share Price; CapitaLand Target Price; CapitaLand Analyst Reports; CapitaLand Dividend History; CapitaLand Announcements; CapitaLand Latest News.

Adrian Loh UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-27

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.7 DOWN 3.800