SINGAPORE (Aug 12): This year, CapitaLand held its 2QFY2019 and 1HFY2019 results briefing in the atrium of Funan (before the shops opened) instead of the auditorium at Capital Tower. Top management had ditched their suits and ties for a more informal look.

Few analysts expressed surprise at the lower reported earnings and revenue as the company had cautioned that Ascendas-Singbridge would only be consolidated in July. All that would show up in 1HFY2019 were likely to be the cost of acquiring ASB.

True enough, for 1HFY2019, CapitaLand’s profit after tax and minority interest (Patmi) dropped 5.3% y-o-y to $875.4 million, and Patmi for 2QFY2019 fell 4.2% y-o-y to $579.8 million. An announcement stated that this was mainly attributed to the one-off transaction cost of $36 million incurred for ASB in 2QFY2019.

Operating Patmi in 1HFY2019 and 2QFY2019 fell 14.9% and 8.4% respectively, due to lower contribution from residential projects in Singapore and China, as there were fewer units handed over compared to the same period a year ago. Revenue in 1HFY2019 fell 21.6% to $2.13 billion. Revenue in 2QFY2019 fell 19.3% to $1,082.8 million mainly due to lower contributions from residential sales, partially mitigated by higher rental revenue from the portfolio of properties in the United States and Europe acquired in 2018. During the second quarter, revenue from investment properties increased by 9.5% year-on-year to $927.9 million.

“Residential contributions is a timing issue and these contributions will catch up in the second half when the handover of residential units in China and Vietnam will come through,” says Andrew Lim, CapitaLand’s CFO.

While the costs associated with the acquisition of ASB have been expensed in 2QFY2019, and CapitaLand has consolidated ASB’s balance sheet, ASB will only start contributing to earnings (P&L) from 3QFY2019 onwards.

CapitaLand’s gearing rose to 0.73 times as at June 30 compared with 0.56 times as at Dec 31. This is marginally higher than the pro forma 0.72x figure that CapitaLand announced in Jan, at the time the acquisition was proposed. “We are confident we will get to our target by the end of next year,” Lim says. In addition, the gearing figure will likely be lower by 3QFY2019 with the consolidation of ASB’s P&L.

In order to meet a gearing ratio target of 0.64 times by end 2020, CapitaLand had set certain divestment benchmarks. The $3 billion target set for this year has been exceeded. In 1HFY2019 CapitaLand has divested assets of $3.41 billion based on a 100% share. Of this $1.2 billion (~35%) completed as at Jun 30 and $171 million of portfolio gain has been booked. The remainder will be booked when completed.

Storhub, CapitaLand’s 49% equity interest in Mubadala CapitaLand Real Estate and 24.09% stake in Hong Kong-listed Central China Real Estate were not divested at a loss, Lim clarifies. Some of the assets were not at a substantial gain. “Mubadala’s divestment was not at a loss but not at a substantial gain and was done to get capital,” Lim replies.

What else could CapitaLand divest? “We look at asset or country and ask if we can build scale and be competitive and grow the portfolio significantly so that it can contribute to CapitaLand’s bottomline. If not we need to review the assets,” says Lee Chee Koon, CEO of CapitaLand.

<strong>Higher residential sales to be booked in 2HFY2019</strong>

In Vietnam, 2,318 units with sales value of $726 million have been sold. Of this, 27% of value or $196 million is likely to be recognised in 2HFY2019. In 1HFY2019, CapitaLand recognised just $52 million of residential sales from Vietnam. In China, RMB3,451 million was recognised in 1HFY2019, lower than that RMB4,120 million recognised in 1HFY2018 compared to RMB6,419 million recognised in 1HFY2019. From 3QDFY2019 onwards, RMB18.3 billion worth of residential properties comprising 7,300 units will be progressively handed to their new owners. Around half of this amount or RMB9 billion or will be recognised in 2HFY2019.

Since the start of the year, the RMB has weakened by less than 1% against the Singapore dollar. In Jan, the RMB was 5.05 to $1, and it is now at RMB5.09 to $1; however since Mar 31, the RMB has weakened by 2.78%

“We are naturally hedged by taking out local currency loans and our Singapore dollar exposure is limited. Every 1% depreciation in the RMB is expected to impact CapitaLand’s profit & loss by 0.3% and balance sheet by 0.6%,” Lim says.

In 1HFY2018, CapitaLand had fee cash flow of around $500 million. In 1HFY2019 though, CapitaLand had a cash outflow of $1.5 billion due to the $2.51 billion of cash used for the acquisition of ASB per the cash flow statement. (CapitaLand paid $3 billion in cash and $3 billion in shares to acquire ASB, with the rest of the $11 billion price tag paid for with debt.)

<strong>Dividends to be maintained</strong>

When asked if CapitaLand will be able to maintain its 12 cents dividend per share for shareholders by the end of the year, Lee answers that the plan is to maintain that dividend.  Net asset value fell to $4.45 as at June 30, down 10 cents from $4.55 as at Dec 31, due to the issuance of $3 billion of new shares to Temasek.

<table border="1" cellpadding="1" cellspacing="1" height="221" width="553"><tbody><tr><td colspan="2" style="text-align: center;"><span><strong>Net gains from the sale and acquisition of investments in 2QFY2019</strong></span></td></tr><tr><td> </td><td style="text-align: center;"><strong>2Q 2019 PATMI ($m)</strong></td></tr><tr><td>Innov Center</td><td style="text-align: center;">55.9</td></tr><tr><td>CapitaMall Yuhuating, CapitaMall Xuefu and CapitaMall Aidemengdun</td><td style="text-align: center;">26.9</td></tr><tr><td>Pufa Tower</td><td style="text-align: center;">6.6</td></tr><tr><td>Transaction costs on acquisition of ASB</td><td style="text-align: center;">(36.1)</td></tr><tr><td>Others</td><td style="text-align: center;"> 0.5</td></tr><tr><td><strong>Total</strong></td><td style="text-align: center;"><strong>53.8</strong></td></tr></tbody></table>

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