CapitaLand - UOB Kay Hian 2021-02-25: A Brighter Outlook In 2021 Despite Recording A Historic Loss In 2020


CapitaLand - A Brighter Outlook In 2021 Despite Recording A Historic Loss In 2020

  • CapitaLand reported a S$1.6b loss for FY20 at the PATMI level that was negatively impacted by S$1.6b in revaluation losses as well as impairments totaling S$861m. See CapitaLand's announcements.
  • In our view, the outlook appears brighter on a sequential basis across CapitaLand’s business segments but recovery may be uneven, and e-commerce remains an ever-present threat.
  • We raise our CapitaLand's profit forecasts for 2021 and 2022 by 10% and 4% respectively. Maintain HOLD.

Moving past the company’s worst ever loss.

  • While CapitaLand (SGX:C31) surprised with a better-than-expected 5% y-o-y increase in revenue to S$6.5b, the company reported its worst loss of S$1.6b. This was attributable to S$1.6b in revaluation losses, with 54% of this coming from three Chinese assets as well as Singapore’s Ion Orchard and Jewel. There were also impairments worth S$861m; two assets in China and one in Australia made up 80% of this number.
  • CapitaLand declared a S$0.09 dividend per share which fell short of our expectation of a S$0.125 dividend per share.

Asset recycling target met despite a difficult year.

  • Despite a difficult 2020, CapitaLand commendably met its asset-recycling target of S$3.0b and thus generated S$154m in portfolio gains, with an average of 9% divestment premium across the company.
  • On the results call, CapitaLand’s management stated that were it not for COVID-19, it could have comfortably doubled this S$3b target. The target of S$3b remains unchanged in 2021.

Residential business the highlight.

  • Residential sales performance recovered quickly over the course of 2H20 after the predictable dip in 2Q20 with 5,100 units sold in China (2019: 5,268) generating a 12% y-o-y increase in sales of ~Rmb15b.
  • In Singapore, 2H20 volumes were 5x higher than 1H20 with management guiding for this strong momentum to continue in 2021.

Retail to recover – to a certain extent

  • CapitaLand’s management pointed to a strong sequential recovery in footfall as well as gross turnover at its retail assets in Singapore and China in 4Q20. However, we do not believe that retail shopping from the local population will make up for inbound tourism spending in the near term.
  • Nevertheless, CapitaLand’s committed occupancy rate remains high at over 88% and positive news on COVID-19 vaccinations and thus for tourism to return, but in a slow manner, is also incrementally positive for the company’s outlook.

Resiliency the order of the day.

  • CapitaLand’s office, business park, industrial and logistics portfolios proved to be resilient in the later part of 2020, registering 85-98% occupancy rates, and on a portfolio basis even managed to see positive rental reversions. The company’s lodging business model, made up of long-stay assets, somewhat buffered the negative impact of COVID-19.
  • Importantly, management disclosed that all of CapitaLand’s properties continue to be operationally cash flow positive. Despite the pandemic, CapitaLand opened 25 new properties globally, adding over 3,900 units with China making up the majority, comprising 10 properties and > 1,800 rooms.

Healthy gearing.

  • In 2020, CapitaLand’s 12% y-o-y increase in total debt was deployed to fund its investments and ongoing development expenditure for projects under construction. Despite this, its gearing of 0.68x remains manageable and allows the company ~S$0.8b in debt headroom to fund any opportunistic acquisitions.

Dealing with the e-commerce threat.

  • CapitaLand is clearly taking the e-commerce threat seriously as it continues to attempt to drive new growth with its “CapitaStar” initiative (which currently has 14m members and 2,700 tenants onboarded), and by tapping into data analytics and increasing online customer engagement. Management emphasised that it is not looking to burn cash in order to build an e-commerce platform and that it would be prudent in its capex spending.

Upgrading earnings forecast

  • We have raised our CapitaLand's 2021 and 2022 net profit forecasts by 10% and 4% respectively on the back of higher y-o-y earnings across the company’s asset classes.

HOLD for CapitaLand

Valuations appear fair

  • At present, CapitaLand is trading more than 1 standard deviation below its 5-year P/B average of 0.73x and at an 11% discount to its 5-year historical P/E average of 19.3x. At our fair value of $3.10, CapitaLand would trade at a 2021F P/B of 0.7x which we view as fair.
  • Catalysts to CapitaLand's share price include continued economic recovery from COVID-19, especially resumption of travel, and also earnings-and valuation-accretive acquisitions in CapitaLand’s key operating geographies of Singapore, Vietnam, India or China.

Adrian Loh UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-25
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.10 UP 2.800