CapitaLand has seen its shares rally for 7.5% across the past three days to close at $2.88 yesterday. This is 38.9% lower than Macquarie Equities Research’s (MER) target price of $4 which was seen in its research report released yesterday (5th October 2015). MER has an ‘Outperform’ rating on the shares, excerpts can be found below…
 
 
Event
Over the last three months, CapitaLand’s (CAPL) shares have corrected by 22%, underperforming the STI by 6 ppts and Chinese developers (under MER’s coverage) by 7ppts. Discount to revalued net asset value (RNAV) has also widened by 15ppt to 46%.
 
In this in-depth report, MER reviews CAPL’s “One CapitaLand” strategy, refresh its estimates and assess CAPL’s medium-term return on equity (ROE) target of 8-12%. Post revision, MER is still calling for 24% core earnings compounded annual growth rate (CAGR) (2015-18E).
 
Impact
“One CapitaLand” strategy. With the divestment of its entire stake in AustraLand and the privatisation of CapitaMalls Asia in 1H14, CAPL is the only listed developer within the group structure, focusing on large-scale integrated developments and shopping malls in Singapore and China. Recurrent income is now 75-80% of its earnings before income and tax (EBIT) and 80% of RNAV.
 
20% of CAPL’s upside driven by REITs (29% RNAV). CAPL’s 5 REITs contribute 29% of CAPL’s RNAV and MER sees 19-43% upside to the 4 REITs that MER covers. MER likes CapitaLand Mall Trust for its resilient retail exposure in Singapore and CapitaLand Commercial Trust for its long weighted average lease expiry (WALE), weathering the huge office supply in 2016.
 
Investment properties (42%) trading well. CAPL’s Raffles City (RC) developments and malls in China net profit income (NPI) grew organically by 6%YoY (in RMB) in 1H15 and MER expects the trend to persist. Coupled with 7 malls and 4 RCs in China completing in FY15-18E, MER sees >20% earnings CAGR here. MER’s asset valuation is ~7% below CAPL’s reported Jun-15 valuation.
 
A fair 20% discount to RNAV. Since 2010, CAPL’s discount to RNAV has correlated better with the Chinese developers’ average. Using a 50-50 SG-China weighted 5-year avg. discount of 25% and reducing this by 5ppts (higher recurrent income), MER thinks a 20% discount is fair.
 
Stub value close to GFC trough. Excluding the value of its investment properties and listed REITs, CAPL’s resi is trading at an 88% discount to MER’s adjusted RNAV (GFC trough: 90%). MER’s China property team maintains its positive view and recent policy relaxation should boost resi sell-through.
 
Earnings and target price revision
FY15-18E EPS: -25%/-18%/-22% due to asset divestments and refinement of the profit recognition of its residential projects. TP -2.2% to S$4.00/sh.
 
Price catalyst
12-month price target: S$4.00 based on a RNAV methodology.
Catalyst: Earnings resilience in 3Q15 results.
 
MER’s action and recommendation
Reiterate Outperform. CAPL is one of MER’s top picks in Macquarie Marquee Ideas, Singapore Strategy and the Asia Property sector. Trading at 0.67x price per book value (PBV) and at a 46% discount to its RNAV (5-yr avg: 36%), MER thinks shares are undervalued. CAPL is on track to reach 8-10% ROE, with above-sector earnings per share (EPS) growth momentum over the next two years.
 

Source: Macquarie Research - 6 Oct 2015