#Stock Summary
Date: 07 April 2018
Rating: BUY
Price: SGD3.61
Target Price: SGD4.42 (22%)
52-Week Price Range: SGD3.42 – 3.88
Market Cap: SGD15.05B
We recommend going long on Capitaland stock, which we believe to have a minimum upside of 20%. As you will see below, the company has a great business model, strong catalysts for growth, and a cheap valuation.
#Company Background
Capitaland is a Singapore based real estate company. Its core businesses are property management, property development, and investment management. It manages a range of properties such as serviced residences, offices, and shopping malls. It is heavily involved in building residences, office buildings, and integrated developments. Last but not least, the investment business comprises 5 real estate investment trusts (REITs) and 15 private funds.
Capitaland’s current market cap is around SGD15 billion. The company has a presence in more than 150 cities in over 30 countries, with Singapore and China as its core markets. Currently it is expanding at a significant pace in regional markets such as Malaysia, Vietnam and Indonesia.
The Singapore property market (office, retail, residential, logistics) has been on the decline for the past few years, but statistics are generally pointing to a gradual recovery in 2018. Singapore’s above-expected GDP growth of 3.6% in 2017, and the Government’s focus on digitisation and transformation of Singapore’s economy, bode well for the property market too.
#Investment Thesis
Capitaland is one of the dominant property developers in Singapore, with its business model being able to generate a stable and recurring income. It’s current share price of $3.61 makes it a significantly underpriced investment. The company’s recent series of aggressive share buybacks suggests that the management thinks likewise. We believe that the stock has 20% upside at minimum. The stock is priced imperfectly for the following reasons:
Significant Upside Due to Portfolio Expansion
There is significantly more upside to the group’s active portfolio expansion than the market has priced in. Recently, CapitaLand acquired the Pearl Bank Apartments in Outram for $728m. In 2017, Capitaland invested approximately S$5.7 billion in new properties. These include Asia Square Tower 2 in Singapore, Innov Center Phase 1 & 2 in Shanghai, Rock Square in Guangzhou, Gallileo office tower in Frankfurt, and Yokohama Blue Avenue, Sun Hamada, Kokugikan Front and Seiyu & Sundrug in Greater Tokyo. In addition, the group opened six integrated developments in China: Raffles City (Hangzhou), Changning (Shanghai and Shenzhen), Capital Square (Shanghai), CapitaMall Westgate (Wuhan) and CapitaLand’s largest mall (Suzhou). The group also expanded its serviced residence business through acquisitions of two prominent hotels in the New York Manhattan district.
Healthy Capital Structure
Based on the 2017 financial statement, Capitaland has good financial ratios with net debt to equity, interest coverage and interest service ratios at 0.49 times, 8.1 times and 6.7 times respectively. This allows the company to respond quickly to any new investment opportunities.
Business Diversification and Transformation
Even though Capitaland’s business model allows it to have a stable recurring income base, the group clearly recognises the importance of transforming and diversifying its business so as to generate new income streams. Below are some examples.
In 2017, the group signed seven mall management contracts (six in China and one in Singapore). This expands the company’s operating network and build a separate source of stable recurring income through management fees.
In light of the expanding millennial traveller segment, Capitaland has come up with a new millennial-focused “live-your- freedom” (lyf) brand that enables the group to directly address the specific preferences of this rapidly growing market. In 2017, Capitaland secured four contracts: lyf Wu Tong Island Shenzhen (2018), lyf DDA Dalian (2019), lyf Funan Singapore (2020) and lyf Farrer Park Singapore (2020).
To compete with the online retail platform preferred by savvy shoppers nowadays, Capitaland is accelerating its online-to-offline (O2O) strategy to enhance consumers’ offline shopping experiences. In 2017, the group signed an agreement to launch an online mall on Lazada Singapore. This is a significant move that highlights Capitaland’s effort to become Singapore’s first omni-channel retail landlord and compete effectively with pure online retailers.
In April 2018, Capitaland announced the launching of its e-payment service “Starpay” for both retailers and consumers. The terminals will be rolled out in over 2,500 stores in 17 CapitaLand malls in Singapore by the end of the year. This smart all-in-one e-payment service will operate across multiparty systems such as American Express, Grab, NETS, DBS, and Alipay.
#Catalysts
There are numerous catalysts in the pipeline for Capitaland! Below are some highlights:
Jewel Changi Airport – this exciting joint venture between Changi Airport Group (CAG) and Capitaland is an integrated lifestyle development located at Changi Airport Terminal 1. It will feature a lush indoor garden with a 40m-high central waterfall, a wide range of retail and dining offerings, facilities for airport operations, a hotel and car park. This development is slated for completion in 2019.
Funan mall – this mall is slated for exciting futuristic developments next year. It was recently closed this year and is expected to reopen in the fourth quarter of 2019. The mall is preparing to digitise customer analytics within its premises, deploy automated guided vehicles (AGV), attach a robotic arm in its retail setting, and implement a 24-hour click-and-collect drive-thru. Shoppers can self-collect their purchases with a QR code sent to their phone at their own convenience, or utilise the 24-hour drive-thru collection service, which is fitted with a state-of-the-art robotic arm that can retrieve their merchandise.
Pearl Bank Apartments – Capitaland has recently acquired Pearl Bank Apartments for $728M. At a land price of $1,515 psf, this is an attractive rate for a prime location site. With an estimated breakeven at $1,900 psf, it is highly likely that the group will launch a lucrative luxury project with a selling price of around $3,000psf and above.
China – 2017 saw the opening of six integrated developments in China: Raffles City (Hangzhou), Changning (Shanghai and Shenzhen), Capital Square (Shanghai), CapitaMall Westgate (Wuhan) and CapitaLand’s largest mall (Suzhou). Such integrated malls benefit from the stable pool of residents, officer workers and tourists who live, work and play in one central location. Suzhou mall, in particular, opened with a high commitment of more than 90%, and attracted over 400,000 shoppers on its first day.
Indonesia – CapitaLand’s first integrated development in Indonesia, The Stature Jakarta, begun works in 4Q 2017 and is slated for completion in 2020.
Vietnam – In January 2017, CapitaLand acquired a prime site in the Central Business District of Ho Chi Minh City to develop an international Grade A office tower which will be connected to an upcoming metro station. The development is expected to be completed in 2020.
#Valuation
We have valued Capitaland using the unlevered DCF analysis. Click here to see our calculations. Based on our conservative estimate, the stock is underpriced and we have valued the stock at $4.42 instead.
Assumptions
Yearly revenue growth: 5.0%
Perpetual growth rate: 1.0%
Yearly EBIT margin: 35%
Calculated WACC: 5.9%
Key Takeaway
Even at our very conservative estimate of 5% annual revenue growth and 1% perpetual growth rate, the company is still valued at more than 20% above its current stock price. Based on our research, we believe that it is extremely likely that actual revenue growth will meet or exceed these estimated numbers. This is due to Capitaland’s deep presence in the core markets of China and Singapore, and emerging strength in markets like Malaysia, Vietnam and Indonesia.
#Risks
Decrease in Revenue of 12.2% in FY2017
The Group’s revenue decreased 12.2% to S$4.6 billion in FY2017, mainly due to lower completion and handover of units from development projects in China. This highlights possible risks in the China business. However, the group bounced back in its first quarter 2018 results, with revenue increasing 53.3% to S$1.38 billion from S$898 million over the same period last year.
Downtown in Property Market
Capitaland’s has a global diversified portfolio that consists of residences, hotels, office buildings, malls and integrated developments. The diversification of the portfolio across different property types should help to hedge against a downturn. In addition, the group has a diversified geographical split across various countries, and therefore a downturn in any particular country’s property market should be mitigated by the portfolio in other countries.
(Update 01 Jun 18) Retirement of Group CEO Mr Lim Ming Yan
The announcement of the retirement of Group CEO Mr Lim Ming Yan was unexpected to many. Mr Lim’s last day in office will be on 31 Dec 2018. This sudden change in management may present a risk to Capitaland if transition of duties is not smooth. As of now, no successor has been named. And so far, the company has not offered any official explanation for Mr Lim’s sudden resignation, who is only 55 years old and has been a Capitaland employee for over 20 years.
