● We are assuming coverage of CapitaLand with a NEUTRAL rating (from Outperform) and a S$3.50 TP (from S$4.70). Management has made good progress in streamlining its business structure, with 75% of assets contributing to recurring income, and 65% of operating EBIT derived from investment properties.
● Earnings growth should be underpinned by its prior investments, although execution over the next few years will be key. In the near term, we expect muted 2015E core net profit growth (+3% YoY), due to lower development profit and impairments made.
● We expect core ROEs to improve marginally from 4.3% in 2014 to 5.6% in 2017E; however, we have less conviction for headline ROEs to reach management's target of 8-12% in 2016E. In addition to subjectivity around revaluation gains, downside risk could arise from potential impairments, macro headwinds weighing on operations, and slower residential contributions.
● While valuations are undemanding at 0.76x P/B (-0.5 SD) and 26% discount to RNAV, we believe near-term upside is limited; hence our NEUTRAL rating.
On track for core earnings growth
We expect CAPL to grow core earnings from S$705 mn in 2014 to S$1,047 mn in 2017E, underpinned by the fruition of its prior investments. However, we believe that execution over the next few years will be key. We expect muted 2015E core net profit growth at 3% YoY, due to lower development profit and impairments made. However, we expect earnings momentum from 2016 to pick up, driven by contributions from CapitaGreen, progressive leasing of Raffles City projects and for CMA, continued yield improvements at existing malls and the opening of four malls in China in 2016. We thus expect core ROEs to improve marginally from 4.3% in 2014 to 5.7% in 2017.
Less conviction on hitting ROE targets of 8-12% in 2016
We forecast core PATMI of S$920 mn in 2016, which would imply c. S$530 mn in gains required to achieve an 8% ROE. A potential divestment of CapitaGreen or revaluation gains on projects under development could be supportive.
In addition to the subjectivity surrounding revaluation gains, we think there could be downside risks on
(1) potential impairments/provisions,
(2) macro headwinds in China weighing on operational performance, and
(3) slower residential presales (residential/strata still constitute 30-40% of operating EBIT).
Valuation undemanding, but not compelling
While valuation is undemanding at 0.76x P/B (-0.5 SD) and 26% discount to RNAV, we believe near-term upside is limited, given uncertainties around earnings growth, ROE targets, and execution risk. (Read Report)
Source : Credit Suisse Asia Pacific Equity Research