CapitaLand 3Q20 Business Update - UOB Kay Hian 2020-11-05: Swings And Roundabouts

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CAPITALAND LIMITED (SGX:C31)

CapitaLand 3Q20 Business Update - Swings And Roundabouts

• CapitaLand’s 3Q20 business update revealed meaningful sequential recovery in some of its businesses, especially residential, retail and business parks, industrial and logistics. However, the outlook for the retail, office and lodging segments appears decidedly weak.
• We do not see any meaningful catalysts for CapitaLand's share price in the near term and thus maintain our HOLD rating.
• Fair value lowered to S$2.80 (previously: S$3.00).
• Entry price: S$2.40.

Reasonably strong update but horizon remains cloudy.

• CapitaLand (SGX:C31) released a mixed 3Q20 business update that, as expected, showed sequential improvement in a number of key metrics; however, the outlook remains cloudy in our view. This is especially true of the office and lodging segments, which reported positive reversions portfolio-wide and better occupancy rates respectively; however, in the next couple of quarters, CapitaLand has warned that both segments are looking at softening market conditions and negative impact from a resurgence of COVID-19 in Europe respectively. As this was a business update, the company did not disclose any revenue or profit numbers.

Strong residential sales momentum

• Strong residential sales momentum was seen across China, Singapore and Vietnam on a sequential basis - and off very low bases - as these three economies continue to recover from the after-effects of COVID-19 shutdowns.
• Of note was Singapore residential, which saw 3Q20 sales increase threefold from 2Q20, while the China residential segment also performed well, selling 1,900 units in 3Q20 (+40% y-o-y), and 3Q20 sales in Vietnam doubled that of 1H20.

Sequentially better retail metrics but tenant sales still down yoy

• CapitaLand reported much better sequential shopper traffic and tenant sales with the gap narrowing back towards pre-COVID-19 levels, although the latter is still significantly down on a y-o-y basis, eg China and Singapore tenant sales for 9M20 are down 38% and 42% y-o-y. On the bright side, committed occupancy rate remained largely stable with almost all of CapitaLand’s tenants having resumed operations; thus tenant retention rate remained high at > 80% for the Singapore portfolio.
• CapitaLand disclosed that over S$320m of rental rebates (excluding government subsidies) have been disbursed to tenants for 9M20.
• In the medium to longer term, CapitaLand stated that it wants to move away from non-core retail assets and increase its exposure to lodging, data centres, business parks and logistics. However, it reiterated that it is not a distressed seller of its non-core retail assets.

Market conditions for office segment "softening", according to management

• CapitaLand observed that in the short term, its tenants are being cautious and deferring their rental decisions for now. As a result, the company has adapted by offering its China and Singapore tenants some flexibility to give them confidence to stay in their current office space for at least the next 6-12 months. It noted that in Singapore, there is little new office supply in the CBD, which is positive for their two new office properties (CapitaSpring and 79 Robinson Road).

Business park, industrial and logistics segment remains robust

• Business park, industrial and logistics segment remains robust with positive rental reversion of 3.6% y-o-y for 9M20, which the company pointed out hides very strong demand from its international business where rental reversions are “in the teens”.
• In particular, CapitaLand highlighted the ongoing theme of decentralisation and thus it is looking to grow “agressively” in the business parks segment.

Lodging remains problematic despite 96% of its properties being operational

• While occupancy rate grew to 50% in 3Q20 (2Q20: 40%) and RevPAR rose 22% q-o-q, this segment continues to have very poor visibility due to travel restrictions globally. Especially with a resurgence of COVID-19 infection rates in Europe, lodging will take a lot more time to recover.
• In particular, CapitaLand pointed out that it has lodging assets in Belgium, the Netherlands, Spain, France and the UK - countries which will face a difficult time in 4Q20.
• Nevertheless, CapitaLand remains committed to long-stay assets as it signed 3,700 new units across 22 properties, of which 60% are in China.

Dividend likely to be maintained.

• CapitaLand stated that it will look to continue paying a similar S$0.12/share dividend as per previous years; however, its dividend reinvestment plan will naturally be a significant part of such plans.
• CapitaLand pointed out that while 1H20 operating PATMI declined 28% y-o-y and its capital recycling programme has not hit its targets, it believes that 2H20 will exhibit sequentially better results, and thus the company will look to maintain its dividend payout for the full year.

We retain our HOLD rating on CapitaLand and lower our fair value to S$2.80.

• We have increased our CapitaLand's RNAV discount to 40% from 30% previously, given:
  1. the continued lack of visibility for a number of the company’s business segments and geographies in which it operates; and
  2. the lack of share price catalysts in the near to medium term.
• Our assessed RNAV of S$4.40 for CapitaLand remains unchanged, but we highlight potential downside risk from impairments at the end of the year.
• See CapitaLand Share Price; CapitaLand Target Price; CapitaLand Analyst Reports; CapitaLand Dividend History; CapitaLand Announcements; CapitaLand Latest News.
• At present, CapitaLand's share price is trading at nearly 3SD below its 5-year P/B average of 0.74x and at a 28% discount to its 5-year historical PE average of 21.6x. At our fair value of $2.80, CapitaLand would trade at a 2021F P/B of 0.61x, which we view as fair.
• CapitaLand's share price underperformed STI in the past three months and since the Mar 20 trough by 2.7ppt and 9.0ppt respectively. In the next 3-4 months, it will be difficult to see any meaningful share price catalysts for CapitaLand.
• Key issues that may weigh on CapitaLand's share price performance include:
  1. limited earnings impact on CapitaLand despite reopening of Singapore, China and Vietnam economies as more retail spending is captured online;
  2. tourism and business travel remains constrained;
  3. poor visibility of lodging business in Europe due to resurgence of COVID-19; and
  4. heightened risk of potential impairments to book value at year end.

Adrian Loh UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-05

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.80 DOWN 3.000