CapitaLand - UOB Kay Hian 2020-08-11: On The Road To Recovery After Poor Results, But May Take Longer Than Expected

CAPITALAND LIMITED (SGX:C31)

CapitaLand - On The Road To Recovery After Poor Results, But May Take Longer Than Expected

As expected, CapitaLand had a tough 1H20 with the COVID-19-related impact and fair value losses at its REIT subsidiaries leading to an 89% slump in PATMI to S$97m. While its key Singapore and China markets are recovering, the pace of this recovery may take longer than expected.
CapitaLand has clearly been putting more efforts on pushing out its e-commerce platform at greater speed and alacrity after seeing the damage wrought on its business in 1H20.

While CapitaLand (SGX:C31)’s 1H20 revenue only declined 6% y-o-y, PATMI dropped 89% y-o-y to S$97m as a result of:
1. fair value losses totaling S$555m due to revaluation of investment properties held through CapitaLand Mall Trust (SGX:C38U) and CapitaLand Commercial Trust (SGX:C61U),
2. Singapore government’s rental relief of S$101m passed down to tenants, and
3. S$159m in rental rebates.
Outlook remains mixed with the positives being the broad-based recovery in China and Singapore offset by a potential prolonged spell in the doldrums for its lodging portfolio in our view. The latter issue is somewhat offset by the fact that CapitaLand is leveraged to long-stay customers via its lyf, Ascott and Citadines brands.

China recovery well on track with residential, retail and commercial all registering positive momentum on a q-o-q basis. In particular, sales value of residential properties rose five-fold q-o-q, and committed occupancy for its commercial properties remains high at 84% as at end-1H20 with positive rental reversions.
On the all-important retail side, CapitaLand’s China malls re-opened with 90.5% of retail tenants in operation while its retail sales rebounded significantly back to 75% and 66% of shopper traffic in May and June 20 vs the same period last year.

Management spent a meaningful amount of time highlighting its initiatives to capture its share of e-commerce spending via ‘accelerating omnichannel solutions’ and ‘future proofing’ its business. Such initiatives included the introduction of e-commerce platforms for retailers and F&B outlets, and livestream sales events in both Singapore and China as well as. These proactive measures are commendable and in the best case scenario should assist CapitaLand’s tenants in surviving through these adverse business conditions.

CapitaLand’s balance sheet has strengthened on a y-o-y basis with net debt/equity falling from 0.73x as at end-1H19 to 0.64x as at end-1H20 with cash and available undrawn facilities totaling S$14b.
In addition, CapitaLand raised S$4.8b in funding ytd, and together with a healthy take-up of its scrip dividend scheme (thus conserving approximately S$390m), it will have a strong liquidity position to take advantage of any potential acquisitions that are priced keenly due to the COVID-19 pandemic.

We lowered our NPAT forecasts by 73% to S$374m for 2020F, and 38% to S$919m for 2021F. The largest negative impact to these forecasts were impairments taken my CapitaLand Mall Trust (SGX:C38U) and CapitaLand Commercial Trust (SGX:C61U) at their respective 1H20 results, assumption changes for the retail and lodging business segments as well as slower sales revenue recognition for the Singapore and China residential segments.

Our 30% discount to our assessed RNAV remains unchanged, however, given that the RNAV has declined 4.3% from S$4.60 to S$4.40 due to the large impairments, our fair value for CapitaLand has also declined.
At present, CapitaLand is trading at a 25% discount to its 5-year historical PE average of 22.2x, and 23% discount to its 10-year historical P/B average of 0.77x. Entry price: S$2.60.

As we had predicted in our last note, CapitaLand's share price underperformed the STI in the past one and three months by 1.2% and 3.7% respectively as earnings troughed in 2Q20. Key issues that may cap CapitaLand's share price performance in the next 3-6 months:
1. despite re-opening of Singaporean, Chinese and Vietnamese economies, earnings impact on CapitaLand may remain muted as more retail spending is captured online and tourism and business travel is constrained; and
2. potential impairments to book value at year-end.
See CapitaLand Share Price; CapitaLand Target Price; CapitaLand Analyst Reports; CapitaLand Dividend History; CapitaLand Announcements; CapitaLand Latest News.

Continued economic recovery from COVID-19, especially resumption of travel.
Earnings and valuation accretive acquisitions in CapitaLand’s key operating geographies of Singapore, Vietnam, India or China.

Adrian Loh UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-11

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