CapitaLand - UOB Kay Hian 2020-05-05: Hoping To Hit The Trough In The Near Term


CapitaLand - Hoping To Hit The Trough In The Near Term

  • CapitaLand’s 1Q20 business update was predictably negative, given the impact of COVID-19 across its businesses and geographies, and 2Q20 will likely be as bad, if not worse. We downgrade 2020 and 2021 net profit forecasts by 29% and 19% respectively.
  • Maintain HOLD and cut our RNAV-based target price to S$3.20 (previously $3.70).
  • Entry price: S$2.70.

CapitaLand 1Q20 business update

  • CapitaLand (SGX:C31) has moved to half-yearly financial reporting and thus released only an update for 1Q20 yesterday as well as hosting a well-attended analyst call. The largely negative tone of the release was not a surprise as its 1Q performance was affected by the COVID-19 pandemic – restrictions in four of its key markets resulted in fewer residential sales and less shoppers at malls.

Lodging the worst hit

  • Unsurprisingly, CapitaLand’s lodging business has suffered the most, given global travel restrictions that gradually came into force from Jan 20. Of its 485 lodging properties, 52 (or 11%) remained closed as at end-1Q20 while lodging fee income fell 9% y-o-y to S$54m.

Light at the end of the tunnel for Singapore

  • With circuit breaker (CB) measures potentially ending on 1 Jun 20, CapitaLand’s residential and retail businesses in Singapore may witness a trough this quarter, although a potentially long and slow recovery may be in store, in our view. Shopper traffic in Singapore slumped nearly 11% y-o-y in 1Q20, although not as badly as in China which saw a 52% y-o-y decline.
  • In Singapore, CapitaLand has passed on all property tax rebates to its tenants as well as provided rental relief to those most badly affected.

On a country basis, China is exhibiting green shoots.

  • China was the highlight as the government has begun to lift lockdown restrictions, thus CapitaLand is seeing early signs of a recovery, eg improving residential sales with ytd sales revenue of Rmb3b. For the remainder of 2020, the company is looking to launch 5,900 residential units in China and in-line with past years’.
  • In the office and business park segments in China, CapitaLand disclosed that 86-95% of its office and business space tenants have resumed work. While shopper traffic at its malls has increased from a very low base in Feb-Mar 20, it has not returned to pre-COVID-19 numbers yet. At present, certain segments of retail malls have not been allowed to re-open, eg children’s education and cinemas.
  • CapitaLand also said that certain Ascott properties in China saw 100% occupancy in the past few days.

Operating conditions in Vietnam remain difficult.

  • CapitaLand said that while lockdown rules have begun to be lifted in Vietnam, it nevertheless expects handover delays for both domestic and foreign buyers of its residential units. In addition, construction progress may potentially be delayed due to government-imposed social-distancing measures and stop-construction orders in Hanoi.

“Cautiously optimistic” on India.

  • In India, a nationwide lockdown was extended from 14 April to 3 May 20. CapitaLand commented that with its Indian portfolio comprising business parks, logistics and industrial space, it is “cautiously optimistic” that its India business is relatively resilient.

Strong balance sheet should tide CapitaLand over.

  • As at end-1Q20, CapitaLand had S$13b in cash and available undrawn facilities while its net debt/equity had risen slightly over the quarter to 0.64x (0.63x at end-19). In addition, the company disclosed that by lowering operating costs and deferring discretionary capex for 2020, it would save some S$200m.

On the lookout for acquisitions

  • During the analyst call, management mentioned a few times that it is on the lookout for acquisition targets that could strengthen the company in the medium to long term, focusing principally in new asset classes like logistics, data centres and business parks.

Downgrade earnings.

  • We cut our net profit forecasts for 2020 and 2021 by 29% and 19% respectively to take into account a multitude of negative earnings pressures on the company as a result of the COVID-19 outbreak. Were it not for the timely Ascendas-Singbridge merger in 2019 which allowed CapitaLand to diversify its earnings stream into logistics and business parks, we believe the impact to the company’s earnings would have been more severe.

Possible impairments at year-end.

  • We want to highlight that some of its assets could possibly incurring impairment charges at the end of this year.

Maintain HOLD

Has consumer behaviour changed as a result of COVID-19?

  • Longer term, we wonder whether consumer and corporate behaviour will forever be changed by the COVID-19 lockdowns, for example, eating more meals at home, or an increase in online grocery/staples or discretionary shopping. The SARS epidemic in 2003 arguably ushered in China’s penchant for transacting online. Should COVID-19 result in long-term changes in consumer and corporate behaviour, this could have a lasting effect on various segments of the property market.

Adrian Loh UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.20 DOWN 3.700