• CAPITALAND LIMITED (SGX:C31)'s 1Q19 core net profit formed 20% of our FY19 forecast, deemed in line as we expect upcoming quarters to be stronger.
• Growth to be driven by newly-opened malls and upcoming residential launches.
• Maintain ADD and Target Price of S$3.56.

CapitaLand's 1Q19 Results Highlights

• CAPITALAND LIMITED (SGX:C31)’s 1Q19 core net profit of S$181.9m came in at 20% of our FY19 forecast but we deem this in line as we anticipate stronger quarters going forward.
• 1Q19 net profit of S$295.6m was down 7.4% y-o-y due to lower residential income from Singapore, Vietnam and China and smaller write-back of impairments, partly offset by gains from asset recycling, S$190m revaluation uplift and new contributions from the US and Europe.
• Stripping out one-offs, core net profit was S$181.9m, -20.5% y-o-y.

Dragged by Lower Residential Contribution

• CapitaLand handed over S$33m (-40% y-o-y) of residential sales in Vietnam and Rmb1,196m (-38% y-o-y) in China in 1Q. Nonetheless, it is scheduled to hand over another RMB10.3bn and S$227m of residential units in China and Vietnam respectively, largely towards end-FY19.
• On a full-year basis, China residential handover would be slightly better than 2018 levels. Meanwhile it is planning to roll out the 774-unit Pearl Bank Apt in 2Q19 and the Sengkang Central integrated development in 3Q19. This should bolster residential contributions going forward.

Rental and Fee Income Lifted by Improving Operations and New Funds

• Retail properties in China, Japan and Singapore continued to enjoy higher shopper traffic and tenant sales. Recent opening of Jewel and Funan (in mid-2019) should boost rental income further.
• The lodging business generated S$59.7m of fee income in 1Q19 while its REIT and fund management platform earned S$49.9m in fees in 1Q19.
• Growth remains visible with the first closing of CREDO I China, its first discretionary real estate debt fund and a new US$391.3m maiden discretionary equity fund (Capitaland Asia Partners I).

Active Asset Recycling and Reinvestment

• CapitaLand made S$760m worth of new investments in 1Q and divested S$485m of assets in 1Q19; it is committed to meet its S$3bn asset recycling target this year. It would continue to look to divest non-core assets as well as potentially unlock value from wholly-owned properties.
• Net debt-to-equity ratio stands at a slightly higher 0.58x, with the implementation of FRS116, and the group remains committed to a target gearing of 0.64x post acquisition of Ascendas-Singbridge.

Maintain ADD Rating

• We raise our FY19 EPS to include the one-off gains locked in 1Q19. We maintain our existing RNAV and Target Price of S$5.48 and S$3.56 for now.
• Going forward, we believe investors would focus on the impact of the Ascendas-Singbridge transaction, which we expect to be RNAV accretive. This has not been factored into our current estimates.
• Downside risks include slower capital deployment.

Source: CGS-CIMB Research - 2 May 2019