• Maintain BUY, Target Price of SGD4.00, 19% upside.
• Despite a challenging global real estate landscape CapitaLand has been fairly active in capital recycling efforts this year, with ~SGD3.9bn in divestments/investments YTD.
• Its recent foray into US multi-family assets further diversifies its asset class and geographical exposure. The yield-accretive acquisitions should boost recurring income, and have the potential to be spun off into its fund management or REIT platforms.
• Dividend yield remains attractive, at 4%, and its share price remains well-supported by buybacks.

Entry Into US Multi-family Sector

Last week, CapitaLand announced the purchase of 16 freehold multi-family properties (3,787 units) in the US for USD835m (SGD1.14bn). The Class-B properties are purchased at par to latest valuation and offer NPI yields of 5.0-5.5%.

The acquisition is earnings-accretive, with pro-forma (2017) EPS accretion estimated at 1.4%. With an average length of stay of ~2 years, we see room for organic rent growth (~3%p.a). It also plans to inject additional capex of ~USD50m for asset enhancements to further enhance yields. There is also potential for the assets to be spun off into a REIT/fund management platform in the medium term, boosting its fund management business.

While merits of the deal are clear, we are slightly concerned on the timing of its expansion in the US, considering the threat of rising interest rates and ongoing trade war tensions.

Active Capital Recycling Continues

• With the latest divestment of its 70% stake in Westgate, CapitaLand YTD has hived off ~SGD3.9bn in assets, based on our estimates, realising SGD240m in gains. 
• It has also effectively redeployed equivalent proceeds across Singapore, China, the US, Europe and Vietnam to achieve an optimal asset mix. We believe these indicate it is taking concerted efforts to achieve a sustainable ROE target of > 8%.

Ascott – Growing at Rapid Pace

Separately, CapitaLand’s serviced residence arm, The Ascott Limited (Ascott), announced the purchase of 70% stake in Tauzia Hotels, a leading hotel operator in Indonesia, for USD26m. The acquisition (20,000 units) will boost Ascott’s portfolio to > 94,000 units globally, surpassing its 2020 target of 80,000 units.

The enhanced portfolio includes Tauzia’s six hotel brands – which should help Ascott to further capture a wide range of customer segments and aid in achieving its ambitious 160,000-unit target by 2023.

New CEO at the Helm

Mr Lee Chee Koon has been appointed as the President & group CEO, effective 15 Sep. Prior to his appointment, he was the Group CIO and has also been instrumental in growing Ascott’s portfolio globally. 

We believe the appointment will help in smoothing the transition of leadership and continuity in CapitaLand’s current portfolio rebalancing strategy.

CapitaLand Remains Our Large-cap Top BUY, With a SGD4.00 TP

We have adjusted our FY18-20F earnings by 1-2%, taking into account its recent acquisitions and divestments. Our Target Price is pegged at a 20% discount to RNAV to factor in policy risks and volatile global macro-economic conditions.

Key catalysts include sizeable M&A transactions and unlocking value through selective divestments.

Source: RHB Invest Research - 24 Sep 2018