Rating: Buy (price target: S$2.35)
With continued government oversight in the China and Singapore residential markets, we think the retail sector is attractive and offers exposure to a stable and defensive asset class that is less prone to policy risk. We forecast a 2012-15 core profit after tax and minority interest (PATMI) CAGR of 22% (excluding revaluation gains). We expect Singapore to be a near-term earnings driver and China to be a medium-term catalyst as its operations ramp up. CapitaMalls Asia’s (CMA’s) expertise in mall positioning and value enhancements should also result in development gains and NAV expansion.
In the coming months, we think CMA could provide details on Project Jewel, the mixed-use development to be constructed in the car park fronting Changi Airport Terminal 1. We believe CMA will likely take a stake and manage the mall. The terms with Changi Airport group should be favourable as CMA was selected for its design concept. Upside from the lease renewal cycle of China malls should also drive earnings higher.
CapitaMalls Asia is focused on building its recurring earnings stream and is no rush to divest assets. Over the next five years, management is positioning for stronger core earnings and is targeting a growth profile comprising 80% operating assets balanced against 20% development assets.
Investments have always been central to CMA’s strategy and we think the capex cycle for growth will continue, but at a steadier pace and to deepen its presence in core cities. The Recycling of stabilised assets into the REITs is likely to be a lower priority. The result should be more sustainable ROE, which we like, and retained value from asset appreciation. We do not believe this ‘hold’ strategy is an impediment to growth, as balance sheet gearing is low at 24%, providing significant capacity to acquire. It is, however, detrimental to CMA’s REITs as they would have to source for assets independently.
As the development of retail assets is highly capital intensive, we think the key risk is fundraising as CMA progresses along the capex cycle.
1) CMA has signed a memorandum of understanding with Changi Airport Group to jointly redevelop the car park site fronting Terminal 1 at Singapore Changi Airport, which should provide the next leg of growth for its Singapore earnings. Management should provide more details by the year’s end and we think the terms are likely to be favourable, as CMA was selected for its design concept. 2) Capital deployment and asset recycling, but at the right price. 3) Continued ramp-up of operational malls.
We base our S$2.35 price target on a 15% discount (in line with that for other developers) to our 2014E sum-of-the-parts valuation of S$2.76. This is derived from the revalued net asset value (RNAV) for its mall assets, market prices for the listed entities and an applied PE multiple for its funds business.