• 1H PATMI was in line with CapitaLand (SGX:C31)’s earlier market guidance. The retail and lodging segments remain badly hit by COVID-19, but the impact was cushioned by stable recurring income from its fund management and industrial portfolios.
• CapitaLand now trades at a 10-year low (-2SD) P/BV of -0.58x, which we believe underestimates its well-diversified portfolio’s strengths.

1H20 Headline PATMI Fell 89% Y-o-y

• CapitaLand's 1H headline PATMI fell 89% y-o-y on revaluation losses of SGD173m and lower portfolio gains, excluding which core operating PATMI dropped a modest 28% y-o-y to SGD261m. The results also include SGD159m in rental rebates.
• Looking ahead, we expect a much stronger 2H (a +80% h-o-h core PATMI rise), as operating conditions in most markets slowly normalise.

China Residential Sales Surge Post Opening

• CapitaLand's 2Q residential sales stood at > 3x at 1,361 units (1Q: 408 units), with fivefold increases in sales value to CNY4.7bn, indicating strong pent-up demand. Gross margins remain healthy ( > 15%), as residential prices have been inching higher. CapitaLand has unbilled sales of CNY18.2bn, which should be progressively booked from 3Q (c.70% set to be recognised in 2H).
• In Singapore, CapitaLand sold 35 units (SGD60m in value) in 1H, and has 1,800 units in the pipeline which we expect to last for the next two years. In Vietnam, delays in securing permits resulted in 120 sold units being returned by buyers in 1H. While this trend is expected to persist in the short term, leading up to elections next year, management is still confident of the long-term outlook.

Divestments to Accelerate in 2H

• CapitaLand said its annual SGD3bn divestment target remains unchanged for this year despite COVID-19. In 1H, the group’s gross divestment value stood at SGD702.3m (effective stake: SGD301.6m), implying a likely > 3x increase in divestments in 2H.
• Key divestment opportunities in our view: Galaxis (75% stake) and some of its China Raffles City mall’s portfolio to REITs or private funds. Acquisitions should be selective, mainly on new economic assets (eg business parks, logistics, and data centres) and possibly new businesses too, if good opportunities arise.
• Gearing stands modest at 0.64x (0.56x ex-REITs), with SGD14bn in cash and undrawn facilities.

Retail and Lodging – Keeping in Pace With Changing Times

• Management highlighted various steps to embrace digitalisation trends, which are starting to bear fruit and increase tenant sales. Early recovery signs are seen across CapitaLand’s lodging portfolio, with 90% of properties now operational and increased demand from domestic tourism and the extended stay segment.

Earnings, Target Price Changes

• Our FY20F-F21F net profit is lowered 21% and 4%, factoring in higher rental rebates and lower contributions from lodging and retail while raising the RNAV discount 5ppts to 30%. We also lower FY20F dividends to 8 cents from 12 cents to reflect less income.
• BUY, with new SGD3.75 Target Price from SGD 4.00, 37% upside.

Source: RHB Invest Research - 11 Aug 2020