CapitaLand Limited: Recovery in Office and Hospitality segments November 13, 2017

PSR Recommendation: ACCUMULATEStatus: MaintainedTarget Price: SGD4.19
  • Continued sales momentum for residential properties at the Group’s key markets Singapore, Vietnam. China launches to remain slow.
  • Office markets in Singapore and China show signs of improvement.
  • RevPAUs for serviced residences seeing recovery in key markets.
  • Tenant sales growth for Singapore malls (40% of total mall portfolio) remains muted.
  • Maintain Accumulate with unchanged TP of S$4.19.

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The Positives

+ Continued sales momentum for residential properties at the Group’s key markets Singapore and Vietnam. China launches to remain slow. S$373mn worth of SG residential units was sold in the quarter, down 29% YoY. But this is mainly due to limited remaining inventory available for sale (Remaining as at 9M17: c.S$627mn). Nonetheless expect growth from Singapore segment to taper with dwindling inventory. Vietnam sales remain buoyant and 90% of launched units in China have been sold as at 30 Sept 2017. China launches (3Q17 down 21% YoY) could remain muted with cooling measures ongoing.

+ Office markets in Singapore and China show signs of improvement. With the exception of the 2 Raffles City office components which started operations last year (Shenzhen and Hangzhou), average occupancy for CAPL’s entire office portfolio stand at c.98%, a marked improvement especially in China where occupancy averaged c.90% as at FY16.

+ RevPAUs for serviced residences seeing recovery in key markets. Three largest markets for Ascott (by total units) – Southeast Asia/Australia (ex-Singapore), China, Europe showed strong YoY RevPAU growth of 1-12% in 3Q17 in local currency terms. China and Europe in particular are showing strong rebounds in RevPAUs after YoY declines for FY16. Declines in RevPAUs YoY were mainly in Singapore and Gulf Region but these are considerably smaller markets for Ascott and CAPL (<8% of total units).

The Negatives

–  Tenant sales growth for Singapore malls (40% of total shopping mall portfolio) remains muted. Same mall tenant sales grew 0.8% YTD. We have yet to witness a meaningful recovery in tenant sales despite a strengthening economy and consumer sentiment. While same-mall NPI continues to grow across most major markets, Singapore’s same-mall NPI was flat YoY at S$683mn. China tenant sales growth look to be stabilising in mid-single digits.

Outlook

With 85% of CAPL’s assets being investment properties (predominantly in Singapore and China) contributing to recurring income, CAPL’s earnings outlook remain stable. RMB13.8bn worth of China residential sales are expected to be handed over and recognised mostly from 4Q17 to FY18 (FY17YTD: RMB9.3bn), which will provide further support to earnings over the next FY. We expect the 3 new Raffles City integrated developments in China which opened in 2Q17 to boost recurring income growth in FY18 as occupancy improves.

Maintain Accumulate with an unchanged TP of S$4.19.

There are signs of recovery for CAPL’s main markets for office and serviced apartment segments. We expect this recovery to sustain as global economies recover. With a strong base of stable recurring income, CAPL’s asset light management contract strategies for its retail and serviced residence segments also enables it to accelerate network and fee revenue growth. We like CAPL’s quality of earnings which have become more recurrent in nature.

Figure 1. RNAV table

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Figure 2. CAPL trades at lower than post-GFC average Price/NAV of 0.89

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About the author

Profile photo of Tan Dehong

Tan Dehong
Investment Analyst
Phillip Securities Research Pte Ltd

Dehong covers primarily the REITs and property developer sector. He has close to 7 years experience in equities related dealing and research roles.

He graduated with a Masters of Science in Applied Finance from SMU and Bachelors of Accountancy from NTU.

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