• 4Q18 operating PATMI +26.1% YoY
• FY18 ROE of 9.3%
• DPS of 12 S cents

4Q18 Results Slightly Below Expectations

CapitaLand’s 4Q18 results fell slightly short of our expectations. Revenue jumped 34.0% YoY to S$1,624.5m due largely to higher handover of units from residential projects in China and Vietnam, coupled with rental income from newly acquired and operational properties in its portfolio. PATMI grew 71.2% YoY to S$475.7m. After adjusting for revaluations, impairments, portfolio gains and realised fair value gains, CapitaLand’s operating PATMI rose 26.1% to S$213.8m.

For FY18, total revenue improved by 21.3% to S$5,602.4m, while PATMI was up 12.3% to S$1,762.5m. After adjustments, CapitaLand’s operating PATMI came in at S$872.2m, which was a decline of 5.9% and this formed 94.4% of our FY18 forecast. If we exclude the gain from the sale of Nassim in 1Q17, FY18 operating PATMI would instead have grown 13.8%.

Real Estate AUM Crossed S$100b, Earlier Than Targeted

For the full-year, management was active on capital recycling, having made divestments amounting to S$4.0b (target: S$3b). Proceeds were redeployed into S$6.1b of new investments. FY18 ROE was 9.3% (target: at least 8%), higher as compared to the 8.6% registered in FY17. Its aim would be to maintain its ROE above its cost of equity on a sustainable basis, ideally at double-digit levels for the former.

A first and final DPS of 12 S cents was declared (payout ratio of 41% on cash PATMI), similar to FY17 and translates into a dividend yield of 3.5%. CapitaLand's real estate AUM rose 12% to S$100.1b, as at end-2018, surpassing its target to hit S$100b by 2020.

Still Positive on China Notwithstanding Headwinds

Although headwinds remain in China, CapitaLand continues to hold an optimistic view on the outlook of the residential market, especially on Tier-1 and selected Tier-2 cities. Its projects there are still able to command margins ranging around 10-30%.

Management highlighted that even if it were to sell its projects at the price cap level of each city, it will still be able to generate positive margins. Back home, CapitaLand remains open to land bank replenishment opportunities, but only if the price is right. After adjustments, we derive a slightly higher fair value estimate of S$3.98 (previously: S$3.96).

Source: OCBC Research - 21 Feb 2019