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News & Analysis Singapore

Why CapitaLand Should Remain On Your Radar

April 2, 2014, Wednesday, 17:27 GMT | 12:27 EST | 20:57 IST | 23:27 SGT
Contributed by Shares Investment


Before you diss the stock because many people have been dumping it recently, do take a closer look on the real value of this giant.

Investors have been selling CapitaLand’s stock as a result of the declination of property prices in the lion city, and other property players, like Wing Tai and City Developments have also seen similar price actions with a strong sign of a downward spiral.

Yes, oversupply and the impact of new Total Debt Servicing Ratio have dampened private residential demand and pricings of such properties.

However, CapitaLand’s strength that might seem to be overly discounted, is none other than its contributions coming in from its retail and commercial/mixed developments segments.


Retail Segment, A Sustainable Growth Driver

Capitaland’s asset mix in Singapore sees a heavy proportion made up by its Retail (42%) segment.

CapitaLand holds more than 65 percent of CapitalMallsAsia, which in turn owns CapitaMall Trust in Singapore and CapitaLand Retail China.

Revenue poured in from CapitaMalls Asia reflected a 49.3 percent jump in FY13, as full on revenue contributions start to roll in for The Star Vista (opened in September 2012) and Olinas Mall (acquired in July 2012).

These two properties are expected to maintain their contribution performances moving forward.

With many residential properties within the buona vista area now fully built, The Star Vista can expect more human traffic to flow in. And this is a good catalyst.

Olinas Mall, based in Japan, is strategically located near two train stations and is near popular tourist attraction, Tokyo Skytree. Good human traffic will also be seen coming from the residential and office crowd from the region itself.

Strong growth seen in China, where the domestic consumption rate is expected to continue growing, saw a growth of 13.1 percent in FY13.

As CapitaMalls Asia has many malls in China, these properties will be direct beneficiaries of this better outlook.

In fact, it was revealed that China malls grew the fastest under CapitaMall Asia’s wing, which saw higher net property income and strong shopper traffic.


Investment Merits

- Current price is 29 percent discount to NAV of $3.77 (Based on price of $2.92)

- Australand’s sale of close to $1 billion gives company the ammo to build a stronger pipeline in Singapore and China

- High occupancy rates and strong shopper traffic across its malls (Singapore and China)

- Higher rental collections from its malls and office buildings

- Full on contributions from The Star Vista and Olinas Mall

- Healthy balance sheet (Net Debt to Equity 0.34x)


Investment Risks

- Dampening property prices for residential properties in Singapore

- Property cooling measures in China could hit its residential properties’ pricing in China, translating to depressed contributions

- Single digit Return on Equity and Return on Asset

- Slow earnings growth for the past three years


SI Research Takeaway

The current price of CapitaLand does provide window of opportunities especially in the value context. Nevertheless, spooked investors, and the outlook of the property market in Singapore will continue to be dampeners on this blue chip.

However, it is noted that CapitaLand is the only property company who have sold all its leftover units at an agreed rate and should not be susceptible to any shocks in such property prices.

Despite that, on the business front, the highlighted strength, and the catalysts packed in its star contributor as listed above showcases a business that exhibits continuity, competitive advantages, and possibility of better revenue, profits and cash inflows.

I will end off this coverage with a quote from Warren Buffett.

“Be fearful when others are greedy, and be greedy when others are fearful”. – Warren Buffett