CapitaLand: Starting The Year Slowly

1Q09 under expectations. CapitaLand (CapLand) reported an 82.7% YoY plunge (-45.0% QoQ) in 1Q09 PATMI to S$42.9m, which were off our estimates and the Street’s (8.5% and 7.8% of DMG’s and Consensus’ FY09F projections respectively). The subdued performance was largely attributable to a lack of divestment gains, absence of income from monetised assets, weaker operating performance from The Ascott Group and slowing residential sales. Stripping away non-recurring items (i.e. divestment gains, forex and MTM losses from hedging instruments), we estimate core operating income would have eased at a more acceptable 2.1% YoY (-29.0% QoQ)to S$139.8m. CapLand’s Financial Business Unit was the quarter’s star performer, posting a 57.9% YoY (+111.9% QoQ) surge in EBIT to S$29.2m.

China continues to deliver. On top of the 390 transacted units from 1 Jan - 22 Mar 09, CapLand sold another 70 units in China before 1Q09 ended. We note that this healthy take-up trumped the 13 units sold in Singapore, as well as the 348 and 55 units sold in 1Q08 and 4Q08 respectively. With 8,011 unlaunched and launched but unsold units, as well as 2.9m sqm in GFA of residential landbank in China, we believe CapLand should be well-poised to benefit from the country’s improving home-buying sentiments. This would also mitigate the current subdued appetite for domestic mid-prime projects, of which CapLand is highly exposed to. On the Retail front, CapLand’s 28 operational suburban retail malls should continue to chip in resilient cashflows given their product offerings of recession-proof basic necessities.

Contribution from Hospitality and Australand trimmed. In light of the deteriorating global hospitality sector, we are paring down topline contribution from serviced residences by 5 - 10% in FY09F – 10F. We have also reduced Australand’s revenue by a further 15% to reflect management’s forecasts of a 30% decline in FY09F operating profit. FY09F and FY10F EPS thus drop by 6.6 – 24.3% to S$0.09 and S$0.14 respectively. Going forward, we reckon CapLand would be less reliant on asset monetisation to drive earnings given the credit markets’ still-constrained condition. As such, it would be more dependent on recurring income from its Financial Business Unit. This will be supported by maiden contributions from two indigenous residential projects (The Seafront and Orchard Residences), as well as new rental income from ION Orchard beginning Jul 09 and the opening of 10 additional Chinese malls in FY09. Maintain NEUTRAL at S$2.36. CapLand’s share price has corrected back to our previous fair value of S$2.60 following our downgrade to NEUTRAL in the report “1Q09 > Half of 2008” dated 16 Apr 09. While we still view CapLand’s balance sheet strength (net gearing: 0.32x and cash: S$5.5b) and financial flexibility positively, and Australand’s recent S$350m debt refinancing exercise has eliminated any near term cash call, we do not envision any tangible catalysts for the counter at the moment. Our revised fair value of S$2.36, at 30% discount to FY09 base case RNAV of S$3.37 (previously S$3.71), assumes latest market values and revised fair values for its listed entities. Maintain NEUTRAL.

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