CapitaLand - OCBC Investment 2021-03-22: When 1 Becomes 2; 3 Major Positives

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CAPITALAND LIMITED (SGX:C31)

CapitaLand - When One Becomes Two

• CapitaLand (SGX:C31) proposed restructuring with new listco to hold its investment management platforms and lodging business.
• Generally positive on proposed restructuring.
• Implied consideration of S$4.102 per share; premium of 23.9% to closing price prior to announcement.

Proposed restructuring to create a ‘cleaner’ structure

• CapitaLand announced a proposed restructuring, where it is aiming to consolidate its investment management platforms (includes its listed REITs and business trust, private equity funds, and property and serviced residences management platforms) and lodging business into “CapitaLand Investment Management (CLIM)”, which will be listed on the Singapore Exchange (SGX-ST) by introduction.
• On the other hand, CapitaLand’s real estate development business will be placed under private ownership to be fully held by CLA Real Estate Holdings (CLA), an indirect wholly owned subsidiary of Temasek, which is the largest shareholder of CapitaLand with an effective stake of 52% stake (as at 12 Mar 2021).
• In a nutshell, this means that the existing CapitaLand (SGX:C31) which is currently listed on SGX-ST would split into two entities, with
  • CapitaLand Investment Management (CLIM) being the listed entity, and
  • CapitaLand Development being the private entity.
• CapitaLand Development will also hold some of the investment properties which are expected to have a longer gestation period.
• CapitaLand will distribute ~48% of shares in CLIM to all its shareholders, excluding CLA. It will continue to own a 52% interest in CLIM upon listing (assuming deal is approved by shareholders).

Generally positive on proposed restructuring

• We see three major positives from this restructuring exercise.
  • First, the new Listco “CapitaLand Investment Management (CLIM)” would comprise its fund management and lodging business which generates more recurring income streams and is expected to fetch a higher valuation than the traditional property development business which will be privatised. This means that CLIM would also be less susceptible to property cooling measures, in our view, which tend to be more targeted at the residential sector.
  • Secondly, CLIM, with a current AUM of S$115b, is expected to be ranked amongst the top three largest listed real estate investment managers globally and the largest in Asia. It aims to grow its funds under management and fee related earnings, and to achieve a sustainable return on equity over cost of equity over the next five years.
  • Thirdly, the overall implied consideration of S$4.102 per share which eligible shareholders of CapitaLand are expected to receive in cash and scrip comes in at a premium of 23.9% to its last closing price of S$3.31 prior to the announcement. This S$4.102 can be broken down as follows:
    1. 1 CLIM share which is valued at S$2.823 (implying 1x NAV),
    2. S$0.951 in cash consideration, and
    3. S$0.328 worth of CapitaLand Integrated Commercial Trust (SGX:C38U) units to be distributed in specie (eligible CapitaLand shareholders’ pro-rata entitlement and CLA’s entitlement distributed in favour of eligible CapitaLand shareholders).

Room to scale up for long-term sustainable growth

• Although more details on this proposed transaction would only be released when CapitaLand publishes its Circular, we believe CapitaLand’s sharpened focus and future growth trajectory warrants a tighter RNAV discount. We consequently lower our RNAV discount peg to 15% from 20% and raise our fair value of CapitaLand to S$4.03 (previously S$3.79).
• 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/ 2021-03-22

SGX Stock Analyst Report BUY MAINTAIN BUY 4.03 UP 3.790