CapitaLand - Revaluations and impairments result in reported loss

CapitaLand announced its first quarterly loss since 4Q03, reporting in at a loss of $156.9m for 2Q09, mainly due to net revaluation and impairment losses to the tune of $280.9m. Core earnings (excluding revaluations and impairments) actually improved by a strong 163% sequentially, due mainly to increased profit recognition from projects in Singapore and China.

CapitaLand handed-over 1,000 completed units this year. To-date, revenue from the Seafront on Meyer has not been recognised - we believe it would feature in the second half. CapitaLand has made a $49m-writedown for the former Char Yong Gardens site, in which it has a 50%-stake. We estimate that this results in a reduced breakeven cost of around $1,965 psf.

CapitaLand reiterated that it will be focusing on these four core markets going forward. The management believes that these markets are backed by strong fundamentals. China will remain as the biggest target market, as the Group aims to increase its asset allocation into China from the current 27% to up to 45% over the next 3-5 years.

CapitaLand just recently committed to subscribe for its portion of Australand’s rights issue to raise A$475m. For their 59% stake, it will require A$281.6m (~S$330m). CapitaLand believes that the residential market in Australia is under-supplied by between 50,000-70,000 units per year, and that the Australian economy is on the road to recovery.

Masked by non-cash writedowns, CapitaLand’s businesses are actually showing improvements operationally. We do expect results in 2H09 to continue to show operational growth. However, the current share price is close to our fair value of $4.29, pegged at a 10%-premium to our FY10 RNAV of $3.90. Downgrading to HOLD on valuation grounds, preferring re-entry at a price of $3.73 for a 15%-upside.

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