Although CapitaLand’s direct investment property portfolio shrank due to a SGD3.3b asset divestment in 2008, it is still vulnerable to asset devaluation, largely to its holdings in listed associates such as CCT SP (31.1%-owned), CT SP (29.6%), CRCT SP (26.6%) and ART SP (47%).
The revaluation surplus/deficit is recognised as earnings contribution, according to its stake in the associate. Some revaluation deficits were already registered in its 4Q08 results: CCT (SGD242m), ART (SGD94m) and CRCT (SGD17m). It also recognised a deficit of SGD59m in its direct portfolio in 4Q08 (the first deficit since 4Q05). We believe this trend has just begun, and that a 10% fall in its listed portfolio valuation would result in BV erosion of 4.9%.
Our provision test on its Singapore land bank shows that large absolute provisions amounting to SGD470m are needed. These provisions come from the three land parcels it bought in 2007 – Char Yong Garden, Gilman Heights and Farrer Court. These impairment provisions represent 4.4% of its BV. Further provisions might be required on its sizeable overseas exposure in Australia, Vietnam and China.
With the fast deteriorating valuation across all asset classes, we believe CapitaLand’s large portfolio will not be spared from a massive asset write-down. As a result, we expect a further deterioration to its current BV. We downgrade to REDUCE with a TP of SGD1.88, pegged at a 40% discount to our RNAV estimate of SGD3.13. We prefer City Development and Keppel Land, which have low impairment and asset devaluation risks.
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