EUR 850.00 For Business Accounts Only

Morningstar | CapitaLand Expands into Industrial Property by Acquiring Ascendas-Singbridge

CapitaLand will acquire Ascendas-Singbridge, or ASB, from Temasek for SGD 6 billion. The deal is expected to be earnings per share-accretive and will increase CapitaLand’s return on equity to 8.8% from 8.4%, based on numbers at the end of the third quarter. The acquisition will add another property type in industrial real estate to CapitaLand’s expanding breadth and reach. This acquisition builds on CapitaLand’s diversification strategy, which saw the property conglomerate acquiring multifamily properties in the United States in September 2018. Both the property type and geography were new for the group. The acquisition of ASB provides exposure to South Korea and the emerging market of India, but also strengthens CapitaLand’s core geographies of Singapore and China. A total of 18.2 million square feet in developable gross floor area for the two latter geographies will be added. From a property type perspective, we do not normally see industrial properties as moaty. Unlike offices and retail properties located in high density areas with efficient scale moat sources, industrial properties tend to be located in lower density areas with development opportunities around the surrounding sites. However, ASB’s industrial properties are high-quality and a sizable part of its portfolio are science and business parks, data centres and logistics, rather than warehouses, which we deem as lesser quality within the industrial property type.

Our narrow economic moat is unchanged as commercial and retail continues to make up a sizable proportion of the group’s earnings. Our fair value of SGD 4.20 is also unchanged and we continue to see the property conglomerate as undervalued.

The acquisition will be funded half by scrip at a price of SGD 3.50 and the balance in debt. Capital position remains prudent despite net debt/equity rising to 0.72 times from 0.51 times, and net debt/EBITDA higher at 5.1 times from 4.2 times at the end of September. Recurring income from ASB’s fund management business will also underpin cash flow for the group and will be applied to lower its gearing to 0.64 times by 2020. This will be supported by SGD 3 billion of divestments annually. CapitaLand’s dividend policy is unchanged and we continue to see fiscal 2018 forecast yield of 3.9% as attractive.

Management noted the two groups’ corporate strategy matches in encompassing the entire value chain in developing, owning and operating its own real estate assets, while also running a fund management business to recycle capital into newer ventures. As the two businesses complement each other, management did not quantify any cost savings involved given the expansion into a new property type. On the revenue side, management highlighted the addition of industrial properties such as science and business parks, will offer corporates with multiple offerings as demand for properties continue to evolve, as exemplified shared and flexible offices for the technology sector.

The implications for the two companies’ listed trusts are possible consolidations and asset acquisitions. Management has cited annual asset disposal totally SGD 3 billion annually as one method to reduce its debt position post the acquisition of ASB. This could see more mature assets divested into its respective trusts. The more obvious consolidation is CapitaLand’s serviced residence unit Ascott with Ascendas Hospitality Trusts. CapitaLand has earlier flagged possible spin-out of Ascott once the business reaches a particular size. As previously noted, the Ascott business still trails larger hotel groups in the number of rooms.