CapitaLand - 1H09: Well-capitalised

CapitaLand reported a net loss of S$156.9m in 2Q09 mainly due to the booking of S$280.9m in revaluation losses and impairment charges, the bulk of which came from its subsidiaries and associates in Singapore and Australia. Excluding the revaluation losses and impairments, 2Q09 PATMI declined 75% yoy to S$124m, bringing 1H09 PATMI to S$171m, down 55% yoy. The results were in line with our expectations with 1H09 PATMI representing 46% of our full-year forecast. Overseas operations accounted for 61% of the EBIT with China (40%) being the major overseas contributor, closely followed by Australia (34.5%).

Capitalising on the recovery in the Singapore residential segment. Residential sales in 2Q09 picked up with CapitaLand managing to sell 94% of 173 units in its Wharf residencies at a median price of S$1,200psf and a few units at the Orchard residences above S$2,787psf levels. CapitaLand is working to get the Gillman Heights site ready for launch in 2H09. This is to be followed by the Char Yong site that has been written down by S$49m to S$ 364m, or S$1,200psf.

Positive contribution from ION Orchard to boost 2H09 earnings. ION Orchard opened its doors on 21 July and is 96% leased, covering a total area of 650,000sqf with a total of 335 shops, out of which over 80 are new-to-market brands and new concepts. It is currently valued at S$3,800psf with potential to be revalued upwards considering that the Wisma Attria next door has received a valuation of S$5,000 psf. The annual revenue for ION Orchard is expected to be around S$200m.

Beneficiary of supportive policy initiatives in China. The residential market in China saw a major boost in 2Q09 following the government’s stimulus measures. In 1H09, CapitaLand sold a total of 1,163 units, nearly 1.5 times the entire 782 units sold during FY08 and revenue also jumped 49% yoy. It has aggressive expansion plans in China with a target to enlarge the asset base from the current 27% to 45% of total asset base in the next five years.

CapitaLand to raise additional S$1.1b via convertible bonds. The Group plans to raise funds worth S$1.1b through convertible bonds due in 2016 with a conversion premium of around 20% (conversion price S$4.79) with a 2.875% coupon to refinance its existing debt and to finance new investments. While we do not see the need to raise additional capital as it has a strong cash position of S$4.2b, we believe it is a capital management initiative to capitalise on the recovery of the credit markets and be even better prepared to take advantage of opportunities. It is expected to improve to improve further from 0.43x to 0.32x. The RNAV is adjusted marginally by 3cents/share to S$4.08.In addition, Capitaland has also secured a credit line of Rmb25b from BOC and ICBC to support its long-term expansion plan in China.

CapitaLand is well-positioned to capitalise on the improved market sentiment with a stronger balance sheet. We maintain our BUY recommendation with a marginal increase in the target price from S$4.85 to S$4.90, pegged at a 20% premium to revised 2009 RNAV of S$4.08/share.

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