CapitaLand - Phillip Securities 2021-03-24: Faster Growth And Re-rating

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CAPITALAND LIMITED (SGX:C31)

CapitaLand - Faster Growth And Re-rating

• CapitaLand's proposed restructuring and demerger of investment-management business to allow unitholders to realise immediate upside from development business (at 0.95x BV offered), compared to CapitaLand’s 20-30% historical discounts to NAV.
• Implied consideration of S$4.102 is 24% premium to last traded price and 5-year VWAP. Comprises S$0.951 cash, one CapitaLand Investment Management (CLIM) unit and 0.155 unit of CapitaLand Integrated Commercial Trust valued at S$2.823 and S$0.328 respectively.
• Maintain BUY on CapitaLand. Target price raised from S$3.75 to S$4.38, based on an 80% probability-weighted RNAV that the demerger will be approved and SOTP.

What’s new?

Proposed restructuring and demerger of investment management business.

• CapitaLand (SGX:C31) and its largest shareholder, CLA Real Estate Holdings Pte Ltd (CLA), have proposed to restructure the group’s businesses by:
  1. consolidating its investment-management platform and lodging business into CapitaLand Investment Management (CLIM); and
  2. decoupling and privatising its property development business with an NAV of S$6.1bn (see Fig5 in report attached below). CLA is an investment holding company, indirectly wholly-owned by Temasek Holdings, with a 51.76% stake in CapitaLand.
• Implied consideration of S$4.102/share will be paid in cash (S$0.951) and the distribution in specie of one CLIM share valued at S$2.823 (1x NAV) and 0.155 unit of CapitaLand Integrated Commercial Trust (SGX:C38U). The S$0.328 figure for CapitaLand Integrated Commercial Trust is based on its last traded price of S$2.122 (see Fig6 in report attached below). The cash consideration will not be reduced by CapitaLand’s proposed FY20 dividend of S$0.09 per share.
• After the restructuring, CapitaLand Investment Management (CLIM) will hold on its balance sheet:
  1. CapitaLand’s stakes in its listed REITs and private funds;
  2. S$10.1bn in investment properties, with a pipeline for injection into the REITs and private funds over the next 2-3 years;
  3. the group’s fund-management platform;
  4. lodging platform; and
  5. the asset managers of the listed REITs and private funds.
• The restructuring is subject to approval from SGX and CapitaLand shareholders at an EGM in 3Q21 Assuming a successful completion sometime in 4Q21, CapitaLand will be delisted and CLIM will be the listed entity.

What do we think?

We see several merits in the scheme.

• By decoupling its development operations from its stable fund management and mature investment property portfolio, we believe investors will benefit from the immediate realisation of the development assets at the 0.95x BV offered, compared to CapitaLand’s historical 20-30% trading discounts to NAV.
• Shareholders can also participate in a potential re-rating of CLIM as real estate investment management (REIM) vehicles historically trade at 1.5-2.6x premiums to NAV. Without a bulky development book, CLIM’s fee and rental revenue from mature investment properties is expected to be more stable.
• The scheme of arrangement will allow the group to sharpen its focus on asset-light and capital-efficient businesses and match each business’ risk-return profile with the appropriate capital sources and capital structures, in our view. CLIM will be positioned as an asset-light, growth business while capital-intensive and longer-gestation development projects and assets, which are usually valued at discounts to RNAV, will be privatised.
• CLIM’s unitholders can still have exposure to development revenue as CLIM is able to establish a development fund to develop projects or jointly develop projects with the privatised CapitaLand Development.

Outlook

Lodging AUM and fund assets under management (FAUM) will continue to be lynchpins of growth for the group.

• On its lodging platform are 52,900 units (30%) that are expected turn operational in the next three years. Once operational, they will begin contributing to earnings. Also, about S$1.0bn of third-party capital under private funds has yet to be deployed and will increase FAUM and fee income when put to play.

Maintain BUY; probability-weighted RNAV target price raised from S$3.75 to S$4.38

• No change to our earnings forecasts for CapitaLand, pending details on the scheme of arrangement in 3Q21.
• Given the clarity on its future direction to isolate its fund-management and lodging platforms, we revert our valuation of The Ascott Limited (Not listed) from DCF to P/E. This is in line with market P/E valuations for REIMs.
• We raise our P/E for its fund-management platform from 12x to 15x, which is the average for investment-management platforms in Asia.
• Our new target price for CapitaLand is based on an 80% probability-weighted RNAV and SOTP-valuations. Our demerger valuations are based on an average of the two valuation methods as outlined in Fig1 and Fig2 in report attached below.
• See CapitaLand Share Price; CapitaLand Target Price; CapitaLand Analyst Reports; CapitaLand Dividend History; CapitaLand Announcements; CapitaLand Latest News.
• CapitaLand is still our top pick for the sector. A high proportion of recurring income and its pivot to New Economy assets are expected to keep earnings stable and future-proof its portfolio.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2021-03-24

SGX Stock Analyst Report BUY MAINTAIN BUY 4.38 UP 3.750