CapitaLand - UOB Kay Hian 2021-03-23: The End Of An Era & The Start Of A New One


CapitaLand - The End Of An Era & The Start Of A New One

  • CapitaLand (SGX:C31) has proposed the privatisation of its capital-intensive property development business while retaining its listed REITs and business trusts, investment management and lodging businesses in a separate listed vehicle, CapitaLand Investment Management (CLIM).
  • We view the development positively as the discount applied to CLIM should narrow given its exposure to stable and growth-oriented property and investment businesses.
  • Upgrade CapitaLand to BUY. New target price: S$3.81.

Restructuring of CapitaLand.

  • CapitaLand announced yesterday that it will undertake a scheme of arrangement to:
    1. consolidate the company’s businesses into CapitaLand Investment Management (CLIM) which will hold its listed REITs and business trusts, selected unlisted funds currently managed by CapitaLand, as well as its lodging business; and
    2. privatise its real estate development business. Assuming the necessary approvals are given at the planned EGM, the whole process is expected to be completed within 4Q21 with the listing of CLIM and the delisting of CapitaLand.

What will the CapitaLand shareholders get?

  • Existing shareholders of CapitaLand will receive
    1. one CapitaLand Investment Management (CLIM) share valued at S$2.823,
    2. CapitaLand Integrated Commercial Trust (SGX:C38U) units worth S$0.323, and
    3. a cash consideration of S$0.951 payable by CLA Real Estate Holdings, the vehicle used for the privatisation of the development business and 100% owned by Temasek.
  • After the transaction, CapitaLand will continue to own a 52% interest of CLIM.

What should investors do?

  • In our scenario analysis below that uses 10% and 20% holding company discounts for CLIM, we arrive at a valuation range of S$3.53-3.81 for CapitaLand. We have used the 10-20% discount as those are typically the discounts that holding companies trade at in public markets. As a result, we have raised our target price of CapitaLand to S$3.81 which is the higher of the two scenarios and have upgraded our recommendation to a BUY.

Rationale for CapitaLand's restructuring.

  • Given that the property development business is capital intensive and has a long gestation period, thus resulting in the public markets not valuing this business fairly, CapitaLand’s board and management decided that a “slimmed down” version of the company without property development would lead to a fairer valuation for the non-property development businesses.
  • During the analyst briefing, management stated that CLIM should be seen as a company with faster earnings growth (without the lumpy nature of property development revenue) and an increasingly asset-light business model in the medium to long term. Management also noted that as a result of the focus on growth, investors should not expect a high dividend yield from CLIM.

What will CapitaLand Investment Management (CLIM) look like?

  • Without property development, CapitaLand Investment Management (CLIM) will have a stable, high-quality recurring income base via its stakes in various REITs and business trusts as well as investment properties.
  • On the investment management side, it will look to continue growing its funds under management (2020: S$78b under management) as well as units under management in its lodging business. For the latter, CapitaLand stated that it has over 122,000 units with a target of 160,000 units by 2023.

Capital recycling will continue to be a theme.

  • At the analyst briefing, CapitaLand's management stated that capital recycling will continue unabated for CLIM going forward, and pointed out its prior successes which has seen it consistently recycle over S$3b annually over 2018-20, with S$5b of this funnelled into CapitaLand’s own REITs and business trusts.

Lodging business to be a key driver of growth for CLIM

  • It appears that CLIM will be banking on the lodging business to deliver bottom-line growth over the next three years, with an additional 38,000 units of serviced residences – or a 9.4% CAGR – over 2020-23. CapitaLand management disclosed that fees for operational units under management are about 70bp making it a lucrative ROE-accretive business. As a rule of thumb, CapitaLand guided that it generates S$20m-25m of fee income for every 10,000 stabilised units.
  • Importantly, CapitaLand believes that the business is reaching an inflection point of ~130,000-140,000 units where the business becomes very capital efficient.

Upgrade CapitaLand to BUY

  • Earnings revision: none.
  • We upgrade our rating on CapitaLand to BUY and raise our fair value to S$3.81 from S$3.10 previously. While our RNAV estimate remains unchanged at S$4.60, we have raised our target price to S$3.81 based on the restructuring proposal from the company.

Potential valuation upside

Adrian Loh UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-23
SGX Stock Analyst Report BUY UPGRADE HOLD 3.81 UP 3.100