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Analysts: Better 2H To Bring CapitaLand 29% Upside
Aspire, Hot Picks | 24 August 2015
By: Lim Si Jie
Articles (169) Profile

CapitaLand’s 2QFY15 was buoyed by higher fair value gains as well as higher shopping mall and serviced residence contributions. On the other hand, 2QFY15 result was partly offset by weaker residential earnings. Overall, 1H15 net profit came in at only 32 percent of analysts’ forecast for FY15.

With 70 percent of the group’s earnings supported by recurring income, CapitaLand is provided with a steadily growing base to sustain its long-term Return on Equity (ROE) targets. Following the recent share price weakness, the stock offers 29 percent upside to its current share price.

2Q Uplift by Higher Fair Value Gains

Capitaland reported an eight percent rise in top line to $1.03 billion, boosted by higher revenue from shopping malls, serviced residence and China residential operations as well as a fair value gain of S$148M from reclassifying a change of use for the Paragon development.

CapitaLand’s Profit After Tax and Minority Interests (PATMI) increased 5.8 percent YoY to $464.0 million, lifted by higher revaluation surplus from investment properties (change of use of two Chinese projects: The Paragon Tower 5 & 6, and Raffles City Changning Tower 3) and one-off gain from the repurchase of bonds. However, PATMI was partially offset by an impairment charge for the International Trade Centre in Tianjin.

Stripping these and other impairments out, CapitaLand’s bottom line would have been $130M (2Q15) and $240 million (1H15), accounting for 32 percent of full-year forecast.

China, Singapore Residential Market Face Headwinds

CapitaLand’s management continues to take a cautious stance towards the domestic residential space and expects persistent headwinds from existing cooling measures. In Singapore, CapitaLand sold 37 units worth $106 million over the quarter. Its domestic unsold inventory stock amounts to approximately $2.7 billion, which is about 7.6 percent of the group’s total assets.

Apart from lower residential profits from Singapore, China contributions dipped on fewer homes completed during the quarter, 702 (worth RMB 1.03 billion) vs. 4,985 units (worth RMB 4.6 billion) in 2Q14. The pace of home sales in China picked up significantly in 2Q15 with 2,764 units sold – up 162 percent YoY versus the 1,054 units sold in 2Q14. However, gross margins for CapitaLand’s Chinese residential segment have eased to around 20 percent and will likely continue to face downward pressure ahead.

The fall in earnings from the Chinese and Singapore market was partly offset by better performance from the shopping mall business, with tenant sales price per square foot and shopper traffic up 11 percent and 4.5 percent yoy respectively. Serviced residence operations also saw a one percent rise in Revenue per available unit (RevPAU).

Overall, CapitaLand’s 2QFY15 results are mostly in line with analysts’ expectations with year to date operating PATMI constituting 55.4 percent of the full year forecast.

FY15 Earnings to be Boosted In 2H15

2H earnings are expected to be better than that of 1H, with a higher scheduled completion of 3,494 units in China, of which 74 percent has already been sold. In addition, contributions from shopping malls and serviced residences have been growing steadily. Two additional malls and Raffles City Changning office tower are also expected to be completed in 2H15.

CapitaLand is keen to sharpen its focus on the role of technology in real estate and has recently led a consortium to invest US$50 million in Tujia, a Beijing-based online apartment-sharing business, and also formed a joint venture to operate and franchise a new brand of serviced apartments in China.

CapitaLand’s recent tie-ups between Ascott and QIA as well as its strategic investment in Tujia will enable the group to leverage its management platforms and increase income, while enhancing its offerings via technology. With a gearing of 0.53x, it is well placed to seek new investment opportunities in its core markets in Singapore and China, and its growth markets in Vietnam.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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