CapitaLand - OCBC Investment 2020-11-12: Recovery Play


CapitaLand - Recovery Play

  • Worst likely over for CapitaLand.
  • Stepping up its capital recycling initiatives.
  • Sufficient liquidity on hand.

Sequential recovery seen; worst likely over

  • CapitaLand (SGX:C31)’s recent 3Q20 business update reflected that the sequential recovery trend is already playing out and that the worst is likely over. We believe CapitaLand is well-positioned as a recovery play, given its exposure to the residential, lodging, retail and office sub-sectors, which constituted 85% of its real estate AUM, as at 30 Sep 2020.
  • For residential, 1,915 units were sold in China in 3Q20, up 40.7% q-o-q and 186.2% y-o-y.
  • For retail, tenants’ sales have rebounded q-o-q in 3Q20, but are still down 31%, 17%, 21% and 15% y-o-y in China, Singapore, Japan and Malaysia, respectively, for 9M20.
  • Committed occupancy rates in CapitaLand’s office portfolio showed a q-o-q improvement in China and Singapore, was flat in Japan, and down marginally in South Korea and Germany.
  • For Lodging, 3Q20 RevPAU increased 22% from 2Q20, although overall occupancy was still soft at ~50%. Business Park, Industrial & Logistics segment remained the most resilient, as > 50% of its monthly gross revenue is derived from less impacted new economy industries, which are tech-driven and/or R&D-focused.

Stepping up its capital recycling initiatives

  • While there were previously market scepticism on whether CapitaLand would be able to meet its annual S$3b gross divestment target this year, CapitaLand has moved to squash this doubt by stepping up on its capital recycling initiatives recently.
  • Year-to-date (as at 6 Nov 2020), CapitaLand has announced S$2.7b of divestments, following the latest announcement on its proposed sale of five business park properties and Rock Square mall stake in China to CapitaLand Retail China Trust (SGX:AU8U). We expect this capital recycling momentum to continue as we move into 2021. This could potentially help to drive a ROE recovery for CapitaLand in FY21, although it might not reach the double-digit levels until FY22, in our view.

Maintaining its healthy balance sheet and liquidity position

  • In terms of financial position, CapitaLand has a strong balance sheet, with a healthy net gearing ratio of 0.64x (as at 30 Sep 2020), or 0.55x if we exclude the REITs which are consolidated on its balance sheet. This leaves it with ample debt headroom of ~S$2.6b before it reaches its comfortable net gearing ratio of 0.7x. Furthermore, CapitaLand's debt maturity profile is well-staggered, at an average of 3.5 years, while interest coverage ratio is also healthy at 4.8x.
  • Given the uncertainties caused by the COVID-19 pandemic, CapitaLand has placed strong focus on maintaining financial discipline by shoring up its liquidity and proactively managing its cash position. CapitaLand has S$14.6b of cash and available undrawn facilities. This is more than sufficient to cover its debt which is maturing until 2022.
  • We maintain our fair value of S$3.75 for CapitaLand, 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.
  • CapitaLand's share price is trading at an attractive forward P/B of 0.60x (based on Refinitiv consensus), which is in-line with its trough 0.60x P/B seen during the last Global Financial Crisis.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-11-12
SGX Stock Analyst Report BUY MAINTAIN BUY 3.750 SAME 3.750