• CapitaLand announced the proposed S$11bn acquisition of Ascendas-Singbridge (ASB).
• The transaction will increase CapitaLand exposure to Industrial and Logistics assets and emerging markets such as India. It will also further boost CapitaLand recurring income.
• Immediately accretive to EPS (+4%) and ROE (+9%), but slightly dilutive to NAV (-4%).
• Maintain ACCUMULATE with TP of S$4.00.

What is the news?

• CapitaLand is acquiring entire shareholding of Ascendas Pte Ltd and Singbridge Pte Ltd, together known as Ascendas-Singbridge (ASB).
• Total transaction value of S$11bn – S$6.0bn equity value, S$4.9bn net debt & minority interest. Funded by 50% CapitaLand shares (S$3.50 per share), and 50% in cash.
• Combined AUM of S$116bn, with a total of 8 REITs and 23 private funds.
• Target EGM: 1H2019, target completion: 3Q2019.

The Positives

+ New pillar of growth via new asset classes and new geographies. CAPL will have new business vertical of Industrial and Logistics. This will diversify its revenue streams and bolster its recurring income. In addition, CAPL will raise its exposure to emerging markets, such as India – which it previously did not have an investment management platform.

+ Higher recurring income. We have always favoured CAPL as it builds up its recurrent earnings (comprising close to 90% of its EBIT, for 9M18), which will be further boosted from this transaction, where operating PATMI from ASB will amount to c.S$300mn.

The Negatives

– Dilutive to NAV. While the transaction is immediately accretive to EPS and ROE, the sticking point is the 4% dilution of NAV. CAPL’s management had expressed confidence in boosting its NAV, mainly via the combined fund management platform and development pipeline.

Outlook

Hitting its 2020 S$100bn AUM target ahead of time, we see this transaction as a positive in the long term, as we witness this real estate player developing critical mass and generating increasingly resilient and recurrent earnings. Deleveraging of S$3bn will be the next step to whip CAPL’s balance sheet back to a 0.64x leverage ratio (pro-forma: 0.72x) by the Group’s targeted Dec 2020 – this is where we could see more asset recycling.

Maintain ACCUMULATE with a target price of S$4.00.

We maintain our ACCUMULATE rating with a target price of S$4.00. Our target price translates to a FY18e P/NAV ratio of 0.75x. No change in our target price as the transaction is still pending shareholder approval.

Source: Phillip Capital Research - 15 Jan 2019