Share price: SGD2.95
Target price: SGD3.88 (from SGD4.10)
Stepping In The Right Direction
The ingredients are there, just need to execute well. CapitaLand has laid out its roadmap to achieve an ROE target of 8-12% on a sustainable basis. With a well-diversified business and a sharper focus on key markets, we believe the group has the necessary competencies to achieve its goals. In particular, we view its China exposure favourably and see it as an important growth market for CapitaLand. We have a BUY recommendation and lower TP to SGD3.88, pegged to a steeper 25% discount to RNAV (previously 20%) to factor in the uncertainties associated with QE tapering.
More than just a residential developer. Management will apportion 65-75% of long-term capital for shopping malls, serviced residences and offices, half of which will be for mixed developments. Residential projects will be limited to 25-35% of long-term capital, but they will also be the source of higher ROEs. Currently, residential business accounts for 32% and 29% of Singapore and China assets respectively.
Aiming to maintain a 2:1 asset split. CapitaLand believes its optimal asset composition comprises two-thirds of operating assets (investment properties, serviced residences and profit-contributing residential projects), and one-third of projects under development. This will be the basis for operating profits to make up ~60% of total PATMI in three years’ time. Revaluations and portfolio gains (both non-recurring) will each make up ~20% of PATMI.
Short-term execution underway. In order to achieve its ROE target, the points of execution for the short term (two years) include the sale of ~1,700 residential units in Singapore, the completion of ~4,100 homes in China, the opening of malls in China and India, the opening of 25-30 serviced residence properties worldwide and the divestment of non-core assets for capital recycling (such as the recent paring down of its stake in Australand from 59% to 39%, raising proceeds of ~SGD485m).
Buybacks underscore attractive valuations. CapitaLand is trading at 0.8x P/BV and a very attractive P/RNAV of 0.58x, revisiting the Global Financial Crisis lows. The group recently bought back 4.55m shares at ~SGD3.00/share, citing the 17% discount to NTA of SGD3.63/share as attractive given the outlook for its businesses in Singapore and China. It may consider further buybacks subject to market conditions.
Publish date: 17/12/13