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Morningstar | CapitaLand Continues to Execute on Diversification Strategy. See Updated Analyst Note from 14 Nov 2018

CapitaLand’s third-quarter results were in line with our estimates and similar to the second quarter with the focus on its strategy to diversify the business. In our view, this is proceeding well. Developed markets now make up 57% of total assets against an even split target between developed markets and emerging markets. Trading, or residential development, also makes up 21% of total assets, close to its earlier target of 20%. The balance is coming from recurring income in investment properties. However, contribution from residential development only makes up 12% of total operating profit, and management acknowledges this is higher than their expectations. We note that residential development has been limited by land acquisition as prices remain elevated, particularly in Singapore, despite a decline in residential home prices. As previously noted, CapitaLand has prudently participated in land auctions. Management acknowledges further landbank acquisition is needed to see a higher contribution coming from trading assets. The strengthening of its land bank was reflected in the investments made in the third quarter. Besides the large acquisition of a multifamily portfolio in the U.S for SGD 1.1 billion, most projects were residential developments in China, Singapore, and Vietnam. With the above metrics on developed versus emerging market exposure, and contribution between investment property and trading assets tracking close to earlier guidance, we are not overly concerned when the above contributions are met. Rather, our focus is on the quality of assets acquired.

Our narrow moat rating is unchanged, along with our fair value estimate of SGD 4.20, and we continue to see the real estate conglomerate as undervalued.

Post the third quarter, two investments were made in China. A 75% stake in a mixed-use project in Guangzhou and a 50% stake, in partnership with GIC, to acquire a mixed development project in the Bund North for SGD 1.27 billion. CapitaLand’s Bund North investment is purchased through RCCIP III fund, in which CapitaLand holds a 41.7% stake. The asset is due to complete by June next year, and management noted the near completion date is an attraction. While this is partially reflected in the price, management believes the acquisition suited its diversification strategy.