• Delisting CMA for S$3.06b cash
• Earnings and ROE accretive deal
• Raising FV to S$3.79

Offer to delist CMA at S$2.22 per share

CapitaLand (CAPL) announced that it will make a voluntary conditional cash offer of S$2.22 per share for all remaining shares of CapitaMalls Asia (CMA) that it does not already hold. Note that CAPL currently owns 65.3% of CMA and would require another 24.7% acceptances to cross the 90% threshold for the offer to be declared unconditional. In that event, CAPL has stated that it intends to compulsorily acquire all shares not acquired under the offer and delist CMA. The offer is expected to cost approximately S$3.06b in cash.

Low-hanging fruit: earnings and ROE accretive deal

In our view, this delisting is a rational move which represents low hanging fruit for earnings and ROE growth. This deal allows CAPL management to deploy significant capital to already well-understood assets in CMA, and accrete to earnings and ROE meaningfully – the latter is now a key strategic focus for management. The group has sufficient balance sheet strength for this deal (net gearing will increase by ~20 ppt to a manageable 59%), and on a posttransaction pro-forma basis, CAPL’s FY13 EPS would have increased from S$0.20 to S$0.24 and ROE from 5.4% to 6.7%. In addition, the privatization of CMA will simplify CAPL’s organizational structure and enable more flexible capital allocation across business segments, therefore enhancing its capabilities in integrated developments.

Maintain BUY – FV raised to S$3.79

We believe that the offer of S$2.22 per CMA share, priced at a 21% premium to book and a reasonable 8% discount to RNAV, will be fairly attractive to CMA shareholders. Our base case scenario is that the delisting of CMA will succeed. Our fair value estimate for CMA is S$2.40 per share, and hence CAPL’s offer at S$2.22 will be value accretive. After updating our model for latest assumptions and reducing the RNAV discount to 25%, from 30% previously, our fair value estimate for CAPL is raised to S$3.79 per share from S$3.50 previously.

Source: OCBC Research - 15 Apr 2014