• Maintain BUY with new SGD3.95 Target Price from SGD4.25, 24% upside.
• Among big-cap developers, CapitaLand has the least exposure to Singapore’s residential segment and is likely to see minimal impact from latest cooling measures.
• We expect sales from China projects to remain steady in 2H18. It also has CNY15.1bn in unbilled revenue from residential projects, which should boost earnings. It should benefit from continued build-up in recurring income base – eight malls opened last year – and higher fee income.

Domestic Residential Segment Accounts for ~4% of Our RNAV Estimates

CapitaLand has already sold 98% of launched projects in Singapore, as at 1Q18. It only has one residential project in the pipeline – redevelopment of Pearl Bank Apartments. It acquired the site at a land cost of SGD1,515psf in February and – considering the site’s attractive location benefits and limited new launches expected in the area – we believe 5-10% margin is still achievable for this project.

China Residential Market Remains Resilient

The firm is expected to progressively hand > 8,000 units in China in 2018-2019 and has unbilled earnings recognition of CNY15.1bn to recognise. Our Hong Kong Research team reiterated in the 12 Jul report Secular Growth Story Continues that China’s property sales momentum is expected to continue in 2H18.

While there are concerns over liquidity and rising funding costs, we believe this should not impact developers with healthy balance sheet – rather, it provides them with an opportunity to do distressed acquisitions.

Boosting Recurring Income Segment

CapitaLand has been steadily boosting recurring income segment by rapidly growing serviced residence business, opening new malls and undertaking mall management contracts, and beefing up fund management wing.

Serviced residence platform – Ascott – has been growing rapidly: 75,000 units in operation, which contributed to a healthy fee income of SGD43m in 1Q18. Another 31,500 units are under various stages of development. When completed, they are likely to boost fee income by ~50%. The REITs/fund management fees in 1Q18 amounted to SGD57.8m, or ~18% of total PATMI.

Dividend Yields of 4% and Share Buyback Programmes Lend Support to Share Price

YTD, CapitaLand has bought back 57.6m of own shares (1.4% of total) worth SGD208.8m. The average purchase price of SGD3.62 is ~20% discount to book value, and is accretive to unitholders’ value. We believe management is likely to continue with buyback plans in 2H18, as the share price is trading at a steep ~37% discount to RNAV.

CapitaLand Remains Our Large-cap Top BUY With New SGD3.95 Target Price

This is pegged at 20% discount, from 15% to our revised RNAV estimate of SGD4.88. The higher discount factors in higher policy risks and global uncertainties.

Key catalysts include sizeable M&A transactions and unlocking value through selective divestments. Prolonged real estate downturns in core markets is a key risk to our call.

Source: RHB Invest Research - 23 Jul 2018