CapitaLand - OCBC Investment 2020-08-11: Well-Positioned For A Recovery


CapitaLand - Well-Positioned For A Recovery

  • CapitaLand's 1H20 operating PATMI fell 27.7% y-o-y.
  • Worst could be over.
  • Prudent on capital management but ready to deploy if opportunities arise.

CapitaLand's 1H20 unsurprisingly hit by COVID-19 as guided

  • CapitaLand (SGX:C31) reported its 1H20 results which missed ours and the street’s expectations. Revenue fell 4.9% y-o-y to S$2,027.4m, but PATMI dipped 89.0% to S$96.6m due largely to fair value losses on revaluation of investment properties (mostly held through CapitaLand Mall Trust (SGX:C38U) and CapitaLand Commercial Trust (SGX:C61U)), rental rebates given to tenants and higher finance costs.
  • Operating PATMI (after stripping out revaluation gains and impairments and portfolio gains) declined 27.7% y-o-y to S$261.2m. This formed 19.7% of our initial FY20 forecast but the magnitude of decline was within CapitaLand’s -25% to -35% profit guidance issued on 6 Jul.

Signs of recovery; capital recycling in motion

  • Despite the challenging 1H20 performance given the COVID-19 pandemic, we believe the worst could be over.
  • On the retail front, shopper traffic and tenant sales appeared to have reached an inflection point, albeit still down on a y-o-y basis. For CapitaLand’s Lodging business, 90% of its 488 properties are opened (as at 15 Jul 2020). Gradual recovery is expected with the resumption of domestic travel, but downside risks remain from potential new infection waves.
  • In China, CapitaLand handed over RMB1.6b worth of residential projects in 1H20, representing a y-o-y dip of 53.8% due to delays from COVID-19. However, ~70% of CapitaLand’s RMB18.2b units sold are expected to be recognised in 2H20, which implies a backend loaded year.
  • CapitaLand also maintained its annual gross divestment target of S$3b for FY20. Given that total gross divestments amounted to S$702.3m to-date (as at 5 Aug), this would imply the potential of a strong pickup in transactional activities for the remainder of the year.

Financial position remains healthy

  • CapitaLand’s balance sheet remains strong, with a net gearing ratio of 0.64x and S$14.0b of cash and available undrawn facilities. We believe this not only provides it with sufficient ammunition to cover its near-term financial obligations, but also allows it to seek inorganic growth when the opportunities arise.
  • Management sounded coy about whether it would be maintaining its dividends per share for the full-year, but highlighted that the final decision on dividends would depend on its cash PATMI performance in 2H20. This would in part be driven by how successful it is able to execute its capital recycling initiatives ahead.
  • We lower our operating PATMI forecasts for FY20F and FY21F by 32.7% and 14.6%, respectively. After updating our fair values estimates and share prices of CapitaLand’s listed entities in our model and incorporating more conservative assumptions, we derive a revised fair value estimate of S$3.75 (previously S$3.99), still pegged to a 20% discount to our RNAV estimate.
  • See CapitaLand Share Price; CapitaLand Target Price; CapitaLand Analyst Reports; CapitaLand Dividend History; CapitaLand Announcements; CapitaLand Latest News.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-08-11
SGX Stock Analyst Report BUY MAINTAIN BUY 3.75 DOWN 3.990