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Morningstar | CapitaLand Wraps Up Year of Change With Solid 4Q Result

Narrow-moat CapitaLand wrapped up fiscal 2018 with a solid fourth-quarter result. Despite a year of change for the property conglomerate, our thesis is unchanged and we continue to see the group’s exposure to emerging markets as attractive at current valuations. Our fair value estimate of SGD 4.20 is unchanged.

By total assets, emerging markets make up 42% of total assets with a target of 50% in the medium term. If the acquisition of Ascendas-Singbridge proceeds, industrial properties will be added to the group. While we view industrial properties as generally lesser quality than central business district office and retail malls, Ascendas’ portfolio consists of higher-quality business and science parks. The acquisition will also widen CapitaLand’s geography base. The SGD 6 billion acquisition will be half funded by equity and cash on hand, and management reiterated a divestment target of SGD 3 billion annually to deleverage after the acquisition. The equity issuance will keep gearing in check for further acquisitions if opportunities arise.

Return on equity has improved steadily over the past three years to 9.3% as a number of investment properties have completed, along with divestment gains. A higher level of revenue recognition for the trading business, or residential units, in both China and Vietnam underpinned revenue and profit for the quarter. We reiterate that revenue from the delivery of residential units is cyclical and only contributes to 20% of the group’s total assets. The focus for the property conglomerate is on the investment properties, which drive recurring revenue and cash flow for the group. The underlying metrics for its investment properties are performing well. Revenue per available unit for its lodging business was up 4% for the year while its Raffles City China portfolio is near fully occupied with the exception of an office tower in Changning. Net property income was higher across most mature properties. For the remainder of its retail portfolio, tenant sales growth per square feet in Singapore was resilient at 1.6% while accelerating in China to 23.2% from 20.9% in the third quarter.