• 2Q19 operating PATMI fell 8.4% YoY
• Committed to its deleveraging target
• Higher handover of China resi projects in 2H19

2Q19 Results Below Expectations

CapitaLand reported its 2Q19 results which missed ours and the street’s expectations. Revenue declined 19.3% YoY to S$1,082.8m due largely to lower contributions from its residential projects in Singapore and China, but partially offset by contribution from acquisitions mainly from US and Europe.

PATMI fell 4.2% YoY to S$579.8m, due largely to one-off transaction costs incurred on the acquisition of Ascendas-Singbridge (ASB). Excluding these, PATMI would have increased 1.7% YoY. Operating PATMI in 2Q19 came in at S$179.5m, a dip of 8.4% YoY and this accounted for 19.5% of our FY19 forecast. For 1H19, CapitaLand’s revenue fell 21.6% to S$2,131.1m while operating PATMI slipped 14.9% to S$361.3m.

Healthy Capital Recycling Pace to Aid Deleveraging Timeframe

CapitaLand has continued to actively recycle its capital, with S$3.4b of divestments announced YTD (up till 6 Aug), of which S$2.1b was divested to its sponsored REITs and funds, a reflection of its robust business model. The total divestment amount has already exceeded CapitaLand’s annual asset recycling target of S$3b.

CapitaLand’s net gearing increased from 0.56x (end-FY18) to 0.73x after completion of the ASB deal. Management highlighted that it was confident of reaching its net gearing target of 0.64x by end-2020, and acknowledged that it was possible that it may reach this target ahead of schedule. Of the S$3.4b worth of divestments announced, ~S$1.2b has been completed as at 30 Jun 2019, which implies that the bulk of the net proceeds have yet to come in.

Likely a Backend Loaded Year

In China, CapitaLand sold 1,807 residential units in 2Q19 with a total sales value of RMB3.85b. This represents YoY growth of 142.2% and 19.1%, respectively. Sell-through rate was high, with 93% of launched units sold, as at 30 Jun 2019. ~3.1k units are ready to be launched across eight cities in 2H19.

In terms of earnings recognition, 7.3k residential units worth RMB18.3b which were sold in China previously are expected to be handed over from 3Q19, of which ~50% of the value is expected to be recognised in 2H19. This implies a backend loaded year as RMB3.45b of pre-sales was handed over in 1H19. We maintain our S$4.04 fair value estimate for now.

Source: OCBC Research - 8 Aug 2019