• Proposed restructuring and demerger of investment-management business to allow unitholders to realise immediate upside from development business (at 0.95x BV offered), compared to CAPL’s 20-30% historical discounts to NAV.
• Implied consideration of S$4.102 is 24% premium to last traded price and 5-year VWAP. Comprises S$0.951 cash, one CLIM unit and 0.155 unit of CICT valued at S$2.823 and S$0.328 respectively.
• Maintain BUY. TP raised from S$3.75 to S$4.38. Our new TP is based on an 80% probability-weighted RNAV that the demerger will be approved and SOTP. Demerger valuations are calculated using the average of the two valuation methods in Figures 1-2

What’s new?

Proposed restructuring and demerger of investment management business. CAPL and its largest shareholder, CLA Real Estate Holdings Pte Ltd (CLA), have proposed to restructure the group’s businesses by: 1) consolidating its investment-management platform and lodging business into CapitaLand Investment Management (CLIM); and 2) decoupling and privatising its property development business with an NAV of S$6.1bn (Figure 5). CLA is an investment holding company, indirectly wholly-owned by Temasek Holdings, with a 51.76% stake in CAPL. 

Implied consideration of S$4.102/share will be paid in cash (S$0.951) and the distribution in specie of one CLIM share valued at S$2.823 (1x NAV) and 0.155 unit of CapitaLand Integrated Commercial Trust (CICT SP, Accumulate, TP S$2.50).  The S$0.328 figure for CICT is based on its last traded price of S$2.122 (Figure 6). The cash consideration will not be reduced by CAPL’s proposed FY20 DPS of 9 cents.

After the restructuring, CLIM will hold on its balance sheet: 1) CAPL’s stakes in its listed REITs and private funds; 2) S$10.1bn in investment properties, with a pipeline for injection into the REITs and private funds over the next 2-3 years; 3) the group’s fund-management platform; 4) lodging platform; and 5) the asset managers of the listed REITs and private funds.

The restructuring is subject to approval from SGX and CAPL shareholders at an EGM in 3Q21 Assuming a successful completion sometime in 4Q21, CAPL will be delisted and CLIM will be the listed entity.

What do we think?

We see several merits in the scheme. By decoupling its development operations from its stable fund management and mature investment property portfolio, we believe investors will benefit from the immediate realisation of the development assets at the 0.95x BV offered, compared to CAPL’s historical 20-30% trading discounts to NAV. Shareholders can also participate in a potential re-rating of CLIM as real estate investment management (REIM) vehicles historically trade at 1.5-2.6x premiums to NAV. Without a bulky development book, CLIM’s fee and rental revenue from mature investment properties is expected to be more stable.

The scheme of arrangement will allow the group to sharpen its focus on asset-light and capital-efficient businesses and match each business’ risk-return profile with the appropriate capital sources and capital structures, in our view. CLIM will be positioned as an asset-light, growth business while capital-intensive and longer-gestation development projects and assets, which are usually valued at discounts to RNAV, will be privatised.

CLIM’s unitholders can still have exposure to development revenue as CLIM is able to establish a development fund to develop projects or jointly develop projects with the privatised CapitaLand Development.

Source: Phillip Capital Research - 24 Mar 2021