Investors have often wondered why seemingly undervalued stocks never seem to get off the ground. Hongkong Land is a prime example of this. Why can’t the stock price narrow the discount between its price and its net asset value (NAV)?
In March this year, CapitaLand’s management gave the market a partial answer. CapitaLand trades at a discount to NAV, and its management had an aim to narrow this discount. For several years, the developer — soon to be restructured — focused on ROE. The stated target was 8%. In 2018, this was raised to 10%.
At an ROE of 10%, CapitaLand would have to make net profit of around $2.3 billion, given its shareholders equity of $23 billion, give or take, and total equity of $39 billion. The higher CapitaLand’s net profit, the more capital would accrue to its shareholders equity because companies put aside retained earnings, or revenue reserves.