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CapitaLand beats ROE target, primes balance sheet for ASB acquisition

Chan Chao Peh
Chan Chao Peh • 5 min read
CapitaLand beats ROE target, primes balance sheet for ASB acquisition
SINGAPORE (Feb 25): Driven by stronger recurring income and contribution from more mature property assets, CapitaLand has reported its highest full-year earnings in a decade for FY2018. In a sign that the company’s scale and financial muscle is coming t
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SINGAPORE (Feb 25): Driven by stronger recurring income and contribution from more mature property assets, CapitaLand has reported its highest full-year earnings in a decade for FY2018. In a sign that the company’s scale and financial muscle is coming to bear, CapitaLand achieved yet another year of improvement in return on equity.

In FY2016, CapitaLand’s ROE was just 6.6%; it improved significantly to 8.6% the following year. The investment community then challenged CapitaLand’s management to sustain the trend — and it did, with a 9.3% ROE for FY2018, which is described as “high water mark” by group chief financial officer Andrew Lim. "We are quite confident we should be able continue to deliver returns that is higher than cost of equity and we aspire to reach sustainable double-digit ROE," says group CEO Lee Chee Koon at the results briefing on Feb 20.

For 4Q ended Dec 31, 2018, CapitaLand’s profit after tax and minority interests (Patmi) improved 71% y-o-y to $475.7 million, underpinned by better operating performance. The company enjoyed higher gains from asset recycling and revaluations of investment properties as well. Revenue in the same period increased 34% y-o-y to $1.62 billion.

For the full year, CapitaLand’s revenue increased 21% y-o-y to $5.6 billion. Patmi increased by a more modest 12% y-o-y to $1.76 billion. The previous record earnings was $2.8 billion in FY2008.

However, despite the improved earnings, CapitaLand is maintaining the same 12 cents a share dividend from last year. The management reiterates its dividend policy of giving out no less than 30% of cash Patmi as dividends. For FY2018, the payout of 12 cents a share translates into a ratio of 41%.

The company’s gearing has also increased slightly from 0.49 time in FY2017 to 0.56 time in FY2018. “It was a conscious decision to sweat our balance sheet a bit more,” says Lim. “Given what lies ahead in the next 12 months, we think we should take a prudent approach,” he adds, referring to the $11 billion deal to buy Ascendas-SingBridge, whose portfolio includes business parks and industrial properties in Singapore and India, and Singapore’s largest REIT, Ascendas REIT.

Under the terms of the acquisition first announced on Jan 14, CapitaLand will fund the purchase with $3 billion worth of new CapitaLand shares at $3.50 each and $3 billion in cash. “We are in a position to fund the acquisition; there’s no need to tap the market,” says Lim. As at Dec 31, 2018, CapitaLand’s cash and cash balances stood at just over $5 billion.

The potential acquisition of the ASB portfolio will add new asset classes for CapitaLand, and as CapitaLand looks for new opportunities to grow these new asset classes, there will be a corresponding need for more resources.

The management says it will continue to apply the same “disciplined”, “unemotional” capital recycling approach to these new assets as it has been doing. Last year, the company divested $4 billion in assets, but invested $6 billion in acquisitions. “Capital recycling is a key pillar of our business,” says Lim.

With the ASB portfolio in its fold, CapitaLand will have more assets and “optionality” to engineer returns. “We want to be able to be disciplined in the use of capital and to seek new funds and to create new REITs. But if the market can offer a better price, we will not hesitate to sell to the market,” says Lee.

The iconic Raffles City Chongqing had its topping up recently, but that aside, last year was a relatively quiet one for Capita­Land in China. It opened a mall each in Shanghai and Beijing, and both have reached full occupancy. CapitaLand managed to achieve single-digit growth in tenant sales, traffic volume and rental reversions.

The company’s residential development business in China took a back seat, though. “We don’t have inventory and also we held back because of cooling measures,” explains Lucas Loh, CapitaLand’s president for China and investment management. For FY2018, Capita­Land sold RMB12.5 billion worth of residential units in China, down from RMB15.8 billion in FY2017. The company remains “fairly optimistic” on this market and will continue to replenish its landbank in locations such as Guangzhou and Chongqing.

With just two residential projects in the pipeline, CapitaLand’s exposure to the Singapore residential market is relatively small, and will be even more so if the ASB deal goes through. The first project is the redevelopment of the iconic Pearl Bank Apartments off Outram Road, which will be ready for launch by the end of 1H2019; the second is a joint-venture condominium project with City Developments in Sengkang, which will hit the market in 2H2019.

Meanwhile, Jewel, the shopping mall at Changi Airport, will be open for business by end-June. The mall will introduce several new brands to Singapore, such as US burger chain Shake Shack. Tenant commitment has reached about 90% as announced in Oct 2018.

When the proposed transaction was announced, CapitaLand had over $92 billion in assets under management as at Sept 30 2018 while Ascendas-Singbridge’s AUM is $23.6 billion. CapitaLand’s management declined to give an updated AUM target, other than the ambition to add to this pile. “We want to grow, but it is not just about growing for AUM’s sake. [We] have to be responsible for the funds entrusted to us,” says Lee.

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