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CapitaLand still a solid 'buy' despite 1Q earnings tumble

Stanislaus Jude Chan
Stanislaus Jude Chan5/2/2018 11:44 AM GMT+08  • 4 min read
CapitaLand still a solid 'buy' despite 1Q earnings tumble
SINGAPORE (May 2): Analysts are brushing aside CapitaLand’s 18.8% decline in 1Q earnings and reiterating their “buy” recommendations on the real estate giant.
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SINGAPORE (May 2): Analysts are brushing aside CapitaLand’s 18.8% decline in 1Q earnings and reiterating their “buy” recommendations on the real estate giant.

The group reported earnings of $319.1 million for the quarter ended March, falling from $392.8 million a year ago.

But this was mainly due to the absence of a $160.9 million gain from the sale of The Nassim in 1Q17.

“Excluding this and other one-off items such as portfolio gains and revaluation gains and impairments, CapitaLand’s adjusted operating PATMI grew 25.0% y-o-y to $228.7 million,” says OCBC Investment Research lead analyst Andy Wong Teck Ching in a Wednesday report.

In addition, CapitaLand saw its 1Q18 revenue jump 53.3% to $1.38 billion, while gross profit surged 78.9% to $602.9 million.

See: CapitaLand reports 18.8% lower 1Q earnings to $319.1 mil on absence of one-off gain

As such, OCBC is keeping its “buy” call on CapitaLand with an unchanged fair value estimate of $4.26.

“Looking ahead, we expect sales momentum to pick up (in China) as CapitaLand has 5,725 launch-ready units over 2Q-4Q18,” says Wong.

He notes that the group is on track to meet its annual capital recycling target of $3 billion. In 1Q18, CapitaLand made divestments amounting to some $1.9 billion, largely due to the divestment of 20 malls across 19 cities in China.

See: CapitaLand divests stakes in companies holding 20 retail assets for $75 mil gain

“[CapitaLand’s] China performance remains robust, supported by residential profits and divestment gains,” says CIMB Research analyst Lock Mun Yee in a Monday report.

In addition, Maybank Kim Eng Research analyst Derrick Heng believes CapitaLand could see more gains from a divestment by CapitaLand Mall Trust (CMT).

“The impending divestment of Sembawang Shopping Centre by CMT for $248 million (versus carrying value of $126.9 million) should lead to another $36 million of gains for its 30% stake in the REIT in 2Q18,” Heng says in a Wednesday report.

Maybank is keeping its “buy” call on CapitaLand with an unchanged target price of $4.10.

Meanwhile, CIMB's Lock points out that CapitaLand is also seeing higher contributions from Vietnam.

“Vietnam enjoyed a surge in profits thanks to gains from the sale of a property investment in 1Q as well as higher handover of 259 units. Residential uptake continued to remain fairly robust, with sales of 95 residential units valued at $23 million in 1Q18,” Lock says.

“The group has a remaining 2,600 units sold valued at $686 million to be handed over from 2Q18 onwards,” she adds.

CIMB is keeping its “add” call on CapitaLand with a slightly higher target price of $4.37, from $4.34 previously.

RHB Research analyst Vijay Natarajan believes CapitaLand has “good potential” in scaling up its presence in Vietnam in the near term, noting that Vietnam currently accounts for only 2% of its total assets.

At the same time, he says CapitaLand could be making a comeback in Singapore’s residential market.

“In Feb 2018, CapitaLand announced the acquisition of Pearl Bank Apartments (PBA) via a collective sale for $929.4 million (includes a lease top-up premium),” Natarajan says in a Wednesday report. “The land acquisition comes after a hiatus of almost four years.”

See: CapitaLand reports 37.8% fall in 4Q earnings to $267.7 mil; acquires Pearl Bank Apartments for $728 mil

“We expect CapitaLand to continue to selectively bid for residential land, and potentially acquire 1-2 more sites in 2018,” he adds. “With the overall pick-up in the residential market sentiment, CapitaLand has sold out most of its launched units.”

RHB is keeping its “buy” recommendation and target price of $4.20 on CapitaLand, which Natarajan describes as one of the brokerage’s top picks in the property developer space.

“Its active efforts to build a stable recurring income base are beginning to reap rewards, with contributions kicking in from eight malls opened last year along with higher fee income,” Natarajan says.

CapitaLand’s Ascott serviced residence portfolio, comprising some 75,000 units, contributed fee income of $43 million in 1Q18. According to Natarajan, another 31,500 units are currently in various stages of development, and could boost fee income by approximately 50%.

The group also targets to double its portfolio to 160,000 units by 2023.

Meanwhile, Natarajan notes that CapitaLand has bought back some 57.4 million of its own shares year-to-date, for a total of $208.8 million. This active share buyback, he says, points towards “a sign of deep value”.

“The average purchase price of $3.62 is at approximately 20% discount to its book value, and is accretive to unitholders’ value. We see this move as a vote of confidence by management towards the stock’s underlying deep value, with shares still trading at approximately 25% discount to RNAV,” he adds.

“We see strong share price support with the company embarking on one of the largest shares buyback programmes in recent history,” says Maybank’s Heng.

As at 11.37am, shares of CapitaLand are trading 1 cent higher at $3.77. According to RHB valuations, this implies an estimated price-to-earnings ratio of 15.3 times and a dividend yield of 3.5% for FY18.

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