Focus on sustainability and growth
Price Target : 12-month S$ 4.36 (Prev S$ 4.44)
•2Q13 results dragged by lower portfolio gains and one-offs
•Strategy to generate recurrent income, capture niche in integrated projects
•Maintain Buy, TP S$4.36
Dragged by lower portfolio gains and one-offs. Capitaland’s results were slightly below expectations. Revenue was 37% higher at S$1.18bn while PATMI was flat at S$383m due to a normalized GP margin of 27.9% (vs 39.5% last year), and after factoring in lower portfolio and revaluation gains and a S$28m one-off charge from repurchase of CBs. Stripping out these items, operating profits would have been S$108m, 20% higher than previously, to reach S$240m for 1H13.
Major residential and retail SBUs expanded. Operations-wise, Singapore, China and CMA reported higher EBIT y-o-y, derived from higher residential sales in Singapore, with recognition of profits from Bedok Residences, and billings from 1,353 homes in China. CMA continued to enjoy higher NPI as its malls ramped up operations amid higher tenant sales.
Targeting 8-12% long term ROE. Post the result, we expect 2H earnings to be better sequentially. Another key takeaway was the result of the strategic review its non-core investments. The group aspires to be a growth company underpinned by steady recurrent earnings, derived from 1/3 development and 2/3 ready assets and would focus on integrated projects in its core markets in Spore and China as part of strategy to deliver a target ROE of 8-12%. We see this as also a platform to generate a sustainable dividend level. On Australand, the company now becomes a key investment rather than a financial investment as earlier mentioned. We do not see this latest outcome as a major deviation from its long term growth strategies and expects the group to potentially reach these targets in the longer term. Balance sheet remains healthy with 0.45x gearing and gross cash hoard of S$5.2b.
More residential launches. The group plans to offer 2 projects in Spore in 2H – Bishan 2, targeting at a different segment than Sky Habitat as well as Marine Point while landed homes at Coronation Rd are likely to come onto the market in 2Q14. In China, it would recognize billings from another 1,900 homes. To extend earnings visibility, the planned launch of 1,400 units is scheduled to augment sales of 1,691 units in 1H. Danga Bay development in Msia would likely be marketed in 2014. CMA and Ascott could continue to focus on expanding income and portfolio through AEIs and newbuilds.
Maintain Buy. We are retaining our Buy call with TP of S$4.36, pegged to a 25% discount to RNAV. The stock is currently trading at a steep 26% below its TP. We believe that the share price gap to TP could close as the group continues to drive ROE improvements towards its long term objective.
Publish date: 26/07/13