Restructuring back on?
▊ We think the partial sale of ALZ could mark the resumption, albeit a gradual one, of CapLand’s restructuring plans. ROE is unlikely to improve immediately but reallocating capital to its core markets is a good start, in our view. We lower our FY13-15 core EPS by 2-8% to account for lower ALZ earnings but our target price (still based on a 20% discount to RNAV) rises due to higher ALZ equity value. Maintain Outperform with catalysts to come from more capital recycling and operational improvements.
CapLand has successfully sold, in a secondary placement exercise, 115.6m stapled securities of Australand Property Group (ALZ AU, Not Rated) or 20% of the total issued stapled securities. The placement was priced at A$3.685/share, a 1.7% discount to the last closing price or at 1x P/BV. This move brings CapLand’s stake in ALZ from 59.1% to 39.1%, with ALZ to be deconsolidated from CapLand’s books. The stapled securities were placed out to institutional investors.
What We Think
A one-time S$163m foreign currency translation reserve and hedging loss will be realised as ALZ’s financials are deconsolidated. This has no impact on its book value as it has already been accounted for. Earnings contribution from ALZ will decline proportionately but we expect new commercial property completions at the CapLand and CMA level to offset the impact. However, we are positive on this move from a strategic standpoint as it potentially marks a resumption, albeit a more gradual one, of its streamlining and restructuring process. CapLand says that ALZ will remain a key investment but is not closing any doors to a full exit. We retain our view that ALZ will eventually be fully divested. The S$485m proceeds are expected to be redeployed into China and/or Singapore. Unlike Australia, these are its core markets, where it can scale up. That said, investors expecting a major lift in ROE in the near term may be disappointed. We estimate ALZ generates around 6.5-7% ROE for CapLand, which could take a few years to achieve for new investments in China commercial properties (ex-reval gains).
What You Should Do
Maintain Outperform, with the stock trading at the widest RNAV discount (38%) among the big-caps.
Publish date: 21/11/13