• Reiterate BUY with new SGD4.20 Target Price from SGD4.00, 14% upside plus 4% yield.
• CapitaLand's 3Q/9M19 results were broadly met.
• Post-merger, CapitaLand – our sector Top Pick – now has a well-balanced portfolio across asset classes and geographies making it a defensive play. The key appeal is the growing recurring income base, especially from its fund management business and asset recycling strategy, which should drive ROE.
• Valuation is attractive at 0.8x P/BV. Our Target Price is based on 20% discount to its RNAV of SGD5.26/share.

Asset Recycling Efforts to Continue Boosting ROE

• YTD, CAPITALAND (SGX:C31) has made gross divestments of SGD5.3bn (FY18: SGD4bn), exceeding last year’s guided target of SGD3bn pa. Management had previously emphasised that capital recycling will be one of the key pillars to deliver its 8- 12% ROE target.
• Looking ahead, we expect capital recycling efforts to continue, with key divestment targets in our view being its Jewel Changi Airport stake, US multifamily assets and China shopping malls. Net gearing stands at 0.69x and management targets to lower it to 0.64x by end-2020.

Steady Growth in Recurring Income Base, Fund Management Is a Key Driver Ahead

• CapitaLand currently derives > 80% of its EBIT from investment properties, with the fund management segment emerging as a key driver, accounting for ~30% of 9M19 net income. Post-merger, CapitaLand’s fund management AUM has jumped 32% to SGD71.7bn with eight REITs and Business Trusts and 25 private equity (PE) funds under its belt.
• Additionally, CapitaLand has also been rapidly expanding its lodging and retail portfolios through management contracts.

Plans to Double India’s AUM to SGD7bn by 2024

• Post Ascendas Singbridge (ASB) merger, India has emerged as one of its key growth markets with CapitaLand aiming to increase its commercial portfolio in India from 17.4m sqf to 40m sqf in the next five years. Its India exposure mainly comprises business and IT parks as well as industrial logistics properties, which we see as a bright growth spot.

Positive Sales Momentum for New Launches in Singapore and China

• Despite the challenging Singapore residential market, CapitaLand’s new residential launches – One Pearl Bank and Sengkang Grand Residences – garnered positive response at the launching that resulted in higher sales volume and value YTD.
• In China, the group sold 3,694 units (+44% y-o-y) at a higher sales value of CNY8.5bn (+13% y-o-y), indicating healthy demand. The healthy pre-sales provide strong earnings visibility with CNY16.1bn in unbilled sales – 30% of it is expected to be recognised in 4Q19.

Earnings Adjustments

• We revise our FY19-21 forecasts by 5-13%, factoring in the recent ASB merger, divestments and other acquisitions.

Source: RHB Invest Research - 6 Nov 2019