CapitaLand Ltd: 2Q09 results marred by fair value losses

Results marred by fair value losses. CapitaLand (CapLand) reported its 2Q09 results and revenue for the quarter fell 27.9% YoY but increased by 21.4% QoQ to S$591.1m. The YoY decline was attributable to lower contributions from development projects and serviced residences operationsand also the absence of revenue from divested commercial properties. Net revaluations and impairment charges of S$280.9m were also recognized in 2Q09 and these largely came from revaluation losses from investment properties and sponsored REITs and provisions made for its development projects in Australia and Singapore (Char Yong Gardens site: S$49m impairment loss) but was partially cushioned by the S$358m revaluation gain from ION Orchard. Reported PATMI for 2Q09 plunged into the red with a loss of S$156.9m but excluding fair value losses, PATMI would have increased by 163% QoQ to S$124m.

Still on track to meet our forecasts. Excluding the revaluation and impairment losses, 1H09 PATMI of S$171m met ~35.2% of our revised FY09 PATMI target of S$485.8m but we remain confident that CapLand will be able to meet our full year expectation. We expect CapLand to deliver a better 2H09 performance, on the back of contribution from ION Orchard, higher contribution from The Seafront on Meyer and The Orchard Residences, and strong home sales in China. Operating performance of its business units had turned around in 2Q09 and could surprise on the upside in 2H09 if regional economies continue to recover.

Raising our ASP for China projects. In China, CapLand sold 703 units in 2Q09, an increase from the 460 units sold in 1Q09. Prices had also been raised by 10%-15% in 1H09. We reiterate our positive view that the China property market will continue to see sustainable demand driven by urbanization and we have now raised our average selling price (ASP) assumptions for CapLand's China projects by 10%.

Positives priced in; maintain HOLD. Our RNAV estimate has now been raised to S$3.73 (previously S$3.34) after raising our ASPs and markingto- market the valuation of CapLand's listed subsidiary and associates. Our fair value has now been raised to S$3.73, pegging to our RNAV estimate. While we remain positive on the prospects for CapLand, we think that much of the optimism has already been priced in as CapLand is now trading at a Price/Book of 1.4x and Price/RNAV of 1.1x. Current macro-economic environment still warrants some cautiousness and we caution against overpricing the optimism and prefer to accumulate at more attractive valuations. We maintain our HOLD rating on CapLand and will turn buyers at S$3.20-S$3.30.

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