CapitaLand announced a voluntary conditional cash offer for the remaining shares in CapitaMalls Asia (CMA) that are not owned by CapitaLand at S$2.22 per CMA share on Monday. This all-cash offer cost about S$3.06 bn and currently, CapitaLand owns 65.3% of CMA.

On the same day, Macquarie Equities Research (MER) released a research report on the developer with a ‘Outperform’ rating and a price target of $4.09. Its target price is still 31.5% away from yesterday’s closing price of $3.11 (+6.5% dod). Some excerpts from the research report are shown below.

Impact
Offer details. The S$2.22 offer price represents a 20.7% premium over CMA’s net asset value (NAV) of S$1.84 as at Dec 2013 and a 27.0% premium to the last one-month volume-weighted average price (VWAP) of CMA (or 22% premium over last Friday’s closing price). Offer is subject only to receiving acceptances which will result in CapitaLand holding more than 90% of CMA. The intention is to delist CMA. There is no requirement for CapitaLand shareholders’ approval.
 
Rationale. This move will further streamline CapitaLand’s organisation structure with a listed developer across all asset classes and five listed REITs for capital recycling. This will also enhance CapitaLand’s strengths in integrated developments. Post this transaction, management expects core CapitaLand will account for circa 61% of assets whilst listed REITs will be about 37%. Recurrent income (retail, commercial and integrated developments and serviced apartments) will be circa 72% of group earnings.
 
Earnings accretive transaction. On a pro-forma basis, CapitaLand expects +13.4% in total assets to S$32bn and EPS uplift of +21.5% to 24 cts. RoE will increase 1.3ppt from 5.4% to 6.7%. However, NAV will fall 3.7% to S$3.65 as a result of the goodwill taken to equity directly. Pro-forma gearing will increase from 39% to 59%. The gearing will be lowered to 53% on MER’s estimates as CapitaLand has since sold its remaining stake in AustraLand (ALZ AU) for S$970m in March 2014.
 
MER’s action and recommendation
MER believes CapitaLand’s offer to privatise CMA is fair, given its only at about an 8% discount to MER’s sum-of-parts valuation of CMA at S$2.41. MER also expects the discount to RNAV for CapitaLand to narrow, given the group is much more simplified without two major listed entities – ALZ AU and CMA SP. CapitaLand was trading at a 15% discount to RNAV three months before the listing of CMA in Nov 2009 and traded at a 25% discount three months after the IPO.

Source: Macquarie Research - 16 Apr 2014