CapitaLand - Multi-pronged earnings drivers
- Four strategic thrusts to drive earnings growth and underpin management’s medium-term ROE target.
- China residential handover and new mall completions would underpin earnings growth over the next two years.
- Maintain Add with an unchanged RNAV-based target price of S$4.17.
Resilient income profile with clear growth thrusts
- CAPL has a resilient income profile with 70-80% of its net profit derived from recurring investment property sources.
- The group’s four-pronged strategy – strengthen its core businesses, evolve its business model to real estate investment and operating platforms, expand AUM by using investment management as a competitive advantage, as well as stay relevant in the future real estate market – is likely to underpin its medium-term ROE target.
China residential activities accelerating
- CAPL has locked in strong residential sales of 9,800 units valued at Rmb14bn as at 3Q16. An estimated 40% of this is expected to be handed over in 4Q16F. Another 1,840 units are launch-ready and in the pipeline.
- We do not expect the government’s recent residential cooling measures to have significant impact on its profile of first time and upgrade buyers.
- It also intends to build a sustainable development pipeline through private negotiation and urban renewal sources to improve returns.
New mall completions to boost income and ROE in FY18F onwards
- CAPL is scheduled to complete the inclusion of eight retail malls in its portfolio by end-2017 – six in China, one each in Malaysia and India. We expect additional rental contributions to kick in and boost ROEs in FY18F onwards.
- Meanwhile, its existing portfolio of malls is enjoying high occupancy of 90-98% and rising tenant sales (1.5- 20.0% yoy) and shopper traffic (1.2-13.5% yoy) in 9M16.
Expanding fee income
- The group is on track to reach its S$10bn AUM target by 2020. Over the past 1-2 years, it has established a US$600m serviced residence and rental housing fund with Qatar investment Authority and set up the US$1.5bn Raffles City China Investment Partners III fund.
- It is also looking to finalise a US$500m Vietnam commercial property fund. This is in addition to the rising management fee income from expanding the portfolio of serviced residences under management by Ascott.
- We like CAPL for its capital recycling model. With gearing of only 0.47x at end-3Q16, it is well placed to capitalise on new investment opportunities, especially through its funds.
- In addition to a steadily-expanding recurring income base, its asset-light strategy should boost ROE in the longer run.
- Maintain Add with an unchanged target price of S$4.71, pegged at a 20% discount to RNAV.
- Downside risks include slower than expected deployment of capital into new investments.