• 3Q18 operating PATMI grew 13.3% YoY
• Active portfolio reconstitution
• Bumper quarter from China in 4Q18

3Q18 Results In-line With Expectations

CapitaLand’s 3Q18 results met our expectations. Revenue declined 16.9% YoY to S$1,260.0m but gross profit jumped 15.3% to S$583.7m. The dip in revenue was largely due to lower contributions from development projects in Singapore and China, but partially offset by higher rental income. PATMI and operating PATMI rose 13.6% and 13.3% YoY to S$362.2m and S$233.7m, respectively.

For 9M18, CapitaLand’s revenue jumped 16.8% to S$3,978.0m; PATMI was down marginally by 0.4% to S$1,286.8m, while operating PATMI fell 13.1% to S$658.4m and this formed 71.3% of our FY18 forecast. If we further strip out the gain of S$160.9m from the sale of 45 units of the Nassim in 1Q17, CapitaLand’s 9M18 adjusted operating PATMI would have grown 10.3%.

Active Capital Recycling; Expect Strong 4Q Recognition From China

CapitaLand has been active on reconstituting its portfolio, making total investments of S$6.1b YTD. This has been partially balanced by divestments amounting to S$4.0b, which generated gains of S$288.7m. Some of the investments include the acquisition of 16 freehold multifamily properties in the U.S. for S$1.14b, joint acquisition of its third Raffles City integrated development in Shanghai (21% effective stake) with GIC and two prime residential sites in Guangzhou.

Looking ahead, CapitaLand has close to 3.5k residential units which are ready to be released in China in 4Q18. It also expects to recognise ~RMB6.4b of revenue (100% basis) from China in 4Q18, which is significant given that 9M18 value recognised was RMB6.2b.

On Track to Meet >8% ROE Target

Given CapitaLand’s active capital recycling strategy and continued efforts to boost the value of its properties, it generated a ROE of 6.9% for 9M18 (annualised ~9.2%). This puts it well on track to deliver its annual ROE target of at least 8%.

CapitaLand’s balance sheet also remains strong, with a net gearing ratio of 0.51x. If we exclude the REITs which are consolidated, net gearing would be ~0.38x. After updating the FV/share prices of CapitaLand’s listed entities and net debt assumptions in our RNAV model, our fair value on CapitaLand moves from S$4.09 to S$3.96, still based on a 20% RNAV discount applied.

Source: OCBC Research - 15 Nov 2018