CapitaLand: S$2.76 BUY (TP: S$0.3.05) - Capitalising on Capitulation

source:DMG

CapitaLand recently posted a 25.6% YoY slide in 3Q08 PATMI to S$419.4m, boosted by gains of S$317.4m from asset divestments. While we recognise CapitaLand’s proven track record of seeking out new residential geographies, we note that a majority of its current projects and landbank (80% of total residential GFA) are situated in Singapore and China. As such, it is not immune from current negative sentiments from these two regions. Although we take heart from recent country and sector-specific policies, we reckon that sentiments would remain soured as long as the global macroeconomic climate does not improve. For CapitaLand, this implies further dampeners on core earnings. In view of the anticipated residential slowdown, we have delayed our sale & launch schedules, as well as assumed price declines of 13 – 28% and 13 – 21% from 2H08 through 2H09 for Singapore and China respectively, with a slight recovery beginning 1H10. Since its listing, CapitaLand has moulded a productive capital recycling model, exemplified today by S$24.8b worth of five REITs and 17 PE funds. While we acknowledge that their contributions would not be as significant as its residential business units, we believe that their recurring and stable nature would help to mitigate the uncertainty and present weakness of the cyclical and lumpy-earnings residential sector. Despite the credit squeeze, recent successful asset divestments suggest that CapitaLand is still able to tap on its private funds and other third parties. Further, with a low net gearing of 0.51x and a cash coffer of S$4.2b, CapitaLand is well-poised to seize any upcoming business opportunities in the different regions which it is operating in. At current levels, CapitaLand is trading at 23% discount to its end-3Q08 NAV of S$3.60. Historically during the past few crises, CapitaLand has been trading at 40 – 60% discount to its NAV. Taking the view that CapitaLand is now of a different stead compared to then, we have thus pegged our RNAV base-case value of S$5.05 to the lower end of that range at 40% discount, implying end-FY09 fair value of S$3.05. Maintain BUY.

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned