CapitaLand - Looks fairly-valued now

Strong recovery in share price. The recent market rally had seen the share price of CapitaLand (CapLand) staging a significant recovery. While the STI has now gained 23.7% after hitting its 52-week closing low of 1,456.95, CapLand has surged 43.6% over the same period. With no catalyst in sight for a sustainable recovery in the property market, we believe that the recent spike in share price is largely sentiment-driven, rather than fundamentally-driven one.

Rights issue completed. Since our last report in February, CapitaLand has completed its Rights issue and with that, it had successfully raised gross proceeds of S$1,835.5m. For CapitaMall Trust's (CMT) Rights issue, CapLand subscribed for a total of 446.1m Rights units and the capital commitment for the subscription amounted to S$365.8m. Upon the completion of its Rights issue and its subscription for CMT's Rights shares, CapLand now has a cash hoard of ~S$5,698.1m and its net gearing has fallen from 0.46x to 0.3x. Focus will now be on the deployment of the funds raised, which could be a potential catalyst to the re-rating of CapLand's shares.

Limited impact on landbank write-down. As the property market continues to deteriorate, we are seeing increasing risks of write-down in landbank, especially those acquired during the later stage of the property upcycle. For CapLand, its acquisition of Char Yong Garden (at S$1,788 psf ppr) and Farrer Court (at ~S$780 psf ppr) could be at risk of write-down. Taking into consideration CapLand's effective stakes in these two acquisitions (50% in Char Yong Gardens and 35% in Farrer Court), CapLand's total exposure is ~S$877m and the exposure on CapLand's book value is limited as these account for ~6.3% of CapLand's book value.

Downgrading to HOLD on valuations; Fair value S$2.51. To reflect the increase in market valuation of its listed REITs and investments, our RNAV estimate of CapLand has now been raised to S$3.06 (previously S$3.00). At current share price of S$2.57, CapLand is trading at price/ book of 0.87x and price/RNAV of 0.84x. We maintain our 30% discount on our valuation of CapLand's development profits and investment properties and no discount for its listed investments. Our fair value of CapLand has now been raised to S$2.51. While fundamentals remain solid, valuation looks rich now. Purely on valuation, we are now downgrading CapLand to HOLD.

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