CapitaLand’s 1.5% slide yesterday could be an opportunity for bullish investors to buy into the property giant. The shares closed at $3.19 which is 22% lower than Macquarie Equities Research (MER) target price of $4.09. Last week, CapitaLand reported 1Q14 net profit of S$182.8m (-1.7% YoY) and EPS of 4.3cts (-2.3% YoY). Operating net profit was +29.9% to S$155.7m, mainly due to higher China residential contribution and improved performance from shopping malls.
 
These results were within MER’s expectations and MER has an ‘Outperform’ rating on the counter. Below are some excerpts from the research report dated 25 April 2014.

Impact
Result highlights. The two core strategic business units (SBUs) (Singapore and China) contributed 83.6% of group EBIT of S$419.5m. CMA’s EBIT +11.5% YoY on contribution from two new malls opened in 2013 in Singapore, higher contribution from associates (ION Orchard and China funds). Ascott EBIT +19.5% YoY on better performance in Indonesia, Vietnam and Europe and new acquisitions. PevPAU on same-store basis +8% YoY to S$116. Book NAV +1.9% to S$3.86.
 
Residential sales. Singapore sales remained subdued, with 34 units sold (S$87m). However, 106 units (S$158m) in Sky Habitat were sold in April as prices were cut in a marketing campaign. In China, the group sold 1,177 units (-48% YoY) worth S$269m (-53% YoY). Overall in China, 87% sell-through rate for projects launched to-date.
 
Offer to privatise CMA. MER believes the offer to privatise CMA at S$2.22 is fair. On completion of the offer, core CapitaLand will be the only listed developer with five listed REITs for capital recycling. The group should be nimbler to respond to new opportunities, especially in mixed-use integrate development projects.
 
Gearing at 37%. This will increase to circa 56% on a pro forma basis post the S$3.06bn all-cash offer to privatize CMA. However, gross proceeds from the sale of Westgate Tower (S$597.4m) will help reduce gearing.
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Price catalyst
12-month price target: S$4.09 based on a Revaluated Net Assets Value (RNAV) methodology.
 
Catalyst: Successful privatisation of CMA by June 2014 and new NAV accretive investments.
 
MER’s action and recommendation
MER 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 November 2009 and traded at a 25% discount three months after the IPO.
 
A simple and nimble group structure should enable CAPL to react faster to new investment opportunities, especially in mixed-use integrated developments, which is the group’s core strength, in MER’s view. The shares look attractive, trading at a 0.85x P/BV and a 36% discount to MER’s RNAV of S$5.11.

Source: Macquarie Research - 29 Apr 2014