SINGAPORE (Nov 6): Analysts are keeping their “buy” calls on property giant CapitaLand, on the back of bullish sentiments following its recent merger with Ascendas-Singbridge (ASB) and robust capital recycling efforts.

“CapitaLand’s competitive advantage is its significant asset base and extensive market network, which has been further boosted following the completion of the Ascendas-Singbridge merger,” says OCBC Investment Research in a Nov 6 report.

The brokerage is maintaining its “buy” recommendation, and raising its fair value estimate by 9.4% to $4.42.

OCBC’s research team says the higher fair value is the result of a lower RNAV discount in its valuations, supported by the “resilient residential markets in Singapore and China”.

The research team notes that CapitaLand in 3Q19 achieved $342 million worth of residential sales in Singapore – more than seven times more than a year ago.

For the 3Q19 ended September, CapitaLand reported an 18.8% surge in operating PATMI to $277.6 million, as revenue jumped 37.1% to $1.73 billion.

The better performance was attributed to maiden contribution from ASB, higher contributions from development projects in China, and fee income from Vietnam.

However, the group recorded a 7.8% drop in 3Q19 earnings to $333.9 million on the absence of a one-time gain of $99.2 million from the divestment of Westgate in August 2018.

See: CapitaLand records 7.8% drop in 3Q earnings to $333.9 mil despite higher revenue

Vijay Natarajan, an analyst at RHB Group Research, notes that following the merger with ASB, CapitaLand is now a defensive play, with “a well-balanced portfolio across asset classes and geographies”.

“The key appeal is the growing recurring income base, especially from its fund management business and asset recycling strategy, which should drive ROE,” he adds.

RHB is keeping its “buy” recommendation and raising its target price by 5% to $4.20. CapitaLand is also the brokerage’s top pick for the property sector.

The way Natarajan sees it, CapitaLand’s asset recycling efforts will continue to boost ROE. Year-to-date, the group has already achieved gross divestments of $5.3 billion – nearly double of its $3 billion target. This is also significantly higher than the $4 billion worth of divestments in the whole of FY18.

“Looking ahead, we expect capital recycling efforts to continue, with key divestment targets in our view being its Jewel Changi Airport stake, US multifamily assets and China shopping malls,” Natarajan says.

CGS-CIMB Research analyst Lock Mun Yee notes that CapitaLand has achieved ROE of 5.8% year-to-date, and agrees that the property group is likely to continue on the asset recycling path.

“We anticipate the group to continue to look for opportunities to trim non-core assets, extract value from existing properties or recycle assets into its REITs and fund platforms,” Lock says.

The asset recycling efforts have seen CapitaLand’s gearing fall to 0.69 times as at end-September, from 0.73 times as at end-June.

“[CapitaLand] appears on track to reach its 0.64 times target by end-2020,” Lock says.

CGS-CIMB is keeping its “add” recommendation on CapitaLand, with an unchanged target price of $4.15.

At the same time, RHB’s Natarajan notes that India has emerged as one of CapitaLand's key growth markets post-merger.

The group is aiming to double its assets under management in India to $7 billion by 2024, and increase its commercial portfolio there from 17.4 million sqft to 40 million sqft in the next five years.

“Its India exposure mainly comprises business and IT parks as well as industrial logistics properties, which we see as a bright growth spot,” Natarajan says.

As at 4.30pm on Wednesday, shares in CapitaLand are trading 2 cents lower at $3.67. According to RHB valuations, this implies an estimated price-to-earnings (P/E) ratio of 17.0 times, a price-to-book (P/B) ratio of 0.8 times, and a dividend yield of 3.5% for FY19F.