There is a shift in management style to one that is more bottom-up, with a focus on improving yields at the project level. ROEs may not improve immediately but we think CapLand is heading the right direction. The partial sale of ALZ could mark the resumption, albeit a gradual one, of CapLand’s restructuring plans.
We keep our earnings estimates and target price, still based on a 20% discount to RNAV. Under our revised rating structure, our call changes from Outperform to Add. The stock could be catalysed by more capital recycling and yield uplifts.
Building an edge in China
We think CapLand is gradually carving out a competitive advantage over the local developers in large-scale commercial and mixed developments. Though not all will bear fruit in the near term, we believe the stage is set for more asset recycling once many of its Raffles City (RC) mixed projects are completed in 2015-17.
Meanwhile, we see improvements at the operational and project levels. Retail mall yields are gradually improving at the CMA level, with asset completions in Singapore and rental reversions from maturing retail malls in China suggesting a strong FY14-15 to come. The outlook for China residential remains mixed, with volumes and pricing still affected by the home purchase restrictions (HPR). That said, this segment forms only 12% of its total GAV – China commercial and mixed developments form the bulk of its GAV. We expect CapLand to carve out more of its commercial projects for strata sales in 2014, a segment not affected by HPR.
Restructuring back on?
CapLand has sold down its stake in ALZ from 59% to 39% through a private placement. CapLand says that ALZ will remain a key investment but it is not closing the door on 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. These are its core markets where it can scale up. ROE is unlikely to improve immediately but reallocating capital to its core markets is a good start, in our view.
The stock trades at 0.8x P/BV and a hefty 39% discount to RNAV. We think the disappointment of 2013 is in the price and the valuation discount should narrow as management takes further steps to divest more non-core assets and simplify its structure.
Publish date: 02/12/13