Rating: Buy (price target: S$4.32)
In 2014, we believe management will continue to drive efficiencies and streamline operations. The key focus will be in the markets of Singapore and China. Non-core holdings will be under review and could be divested. Its medium-term goal is to achieve 8-12% ROE on a sustainable basis with an optimum growth profile comprising one-third development properties and two-thirds recurring income. The focus will be on integrated large scale projects, particularly in China.
We expect the group to continue to invest. Net gearing is healthy at 45% and cash of S$5.2bn provides significant acquisitive capacity. In Singapore, we expect the completion of Bedok mall (82.7% effective stake) and Westgate mall (58.1% effective stake) to provide a new recurring earnings stream. CapitaMalls Asia will also be a key driver of growth, and we forecast a 22% 2012-15 core earnings CAGR. In China, we think the group needs to drive asset churn to rebuild investor confidence. Relative to peers, CapitaLand's home sales in China have lagged and failed to reflect the general momentum in the market.
At CapitaLand's office block in Jurong, our checks show agents have been told to stop leasing efforts as management may be contemplating a bloc or strata sale of the 22- storey 320,000sqft office block. We believe the target asking price is around S$2,200psf and would remove the leasing pressure on the asset.
We reiterate our Buy rating on CapitaLand on valuations. The stock is trading at a steep discount to RNAV of around 37%. We think major strategic initiatives, capital management and good acquisitions will help narrow the RNAV discount.
Catalysts include RNAV-accretive acquisitions, and stronger-than-expected home sales, which would improve investor sentiment on the residential sector. Continued optimisation of non-core assets and operations would also result in improved operating metrics and a reduced RNAV discount.
Our S$4.32 price target is based on 0.9x 2013E RNAV.