Capitaland - Worst appears priced in for Singapore residential market

Firepower for new investments: Post rights, gross cash balance of CAPL increases to ~S$6.1bn, of which ~S$4.8bn is at the corporate treasury level. Gearing is reduced from 0.47x to 0.27x. Once we impute ‘worst case’ 2009E B/S downside of ~S$2.7bn (assuming REIT funding S$760mn, asset impairment S$1.4bn and capex S$0.5bn), CAPL would still have ~S$1.3bn to plough into investments while maintaining leverage below 0.5x. This gives us confidence that CAPL will not need to raise further equity in this cycle.

Track record of delivering returns: From our perspective, CAPL has established a track record of delivering shareholder returns through the cycle. We believe that management will redeploy cash by pursuing distressed assets and/or companies. With the holding power to ride through the cycle, we believe acquisitions will reward the group via divestment gains in future periods.

Worst appears priced in for Singapore residential market: Singapore property stocks trade with a high correlation to the domestic residential market. In past cycles, property stocks bottomed in line with troughs in transaction volumes. In 4Q08, residential transactions hit 10 year lows. While we think pricing will take another 9-12 months to correct, we believe downside from the residential market is already reflected in share prices.

Weak global economic outlook: Macro shocks to the Asian region, which may damp consumer sentiment and undermine property markets in general.

Further weakening of regional property markets: Further deterioration in outlook of regional property markets will hit CAPL, given its exposure to China, Australia and various other markets.

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