PhillipCapital analyst Natalie Ong has maintained her ‘buy’ rating for CapitaLand with a higher target price of $4.38 from $3.75 previously following the company’s proposed restructuring and demerger of its investment-management business.
Under a proposed scheme of arrangement with CLA Real Estate Holdings, CapitaLand will consolidate its investment management platforms as well as its lodging business into CapitaLand Investment Management (CLIM), which will be listed on the Singapore Exchange (SGX), while its property development business with net asset value (NAV) of $6.1 billion will be decoupled and privatised.
Ong says she sees several merits in the scheme. “By decoupling its development operations from its stable fund management and mature investment property portfolio, we believe investors will benefit from the immediate realisation of the development assets at the 0.95 times book value offered, compared to CapitaLand’s historical 20-30% trading discounts to NAV,” she explains.
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She also points out that shareholders can participate in a potential re-rating of CLIM as real estate investment management (REIM) vehicles historically trade at 1.5-2.6 times premiums to NAV. Without a bulky development book, CLIM’s fee and rental revenue from mature investment properties is expected to be more stable.
She believes that CLIM will be positioned as an asset-light, growth business while capital-intensive and longer-gestation development projects and assets, which are usually valued at discounts to realisable net asset value (RNAV), will be privatised.
Looking ahead, the group’s growth will continue to be underpinned by lodging assets under management and funds assets under management (FAUM). CapitaLand’s lodging platform includes 52,900 units (30%) that are expected to turn operational and begin contributing earnings in the next three years.
“Also, about $1.0 billion of third-party capital under private funds has yet to be deployed and will increase FAUM and fee income when put to play,” she adds.
SEE:CapitaLand's revamp paves way for Singapore developers to follow
Ong’s earnings forecast remains unchanged, pending further details on the scheme of arrangement. Instead, her higher target price is based on an 80%/20% probability-weighted average between an RNAV-based target price and sum-of-the-parts assuming the demerger happens as well as a target price assuming the demerger does not happen.
Overall, CapitaLand remains Ong’s top pick for the sector given its high proportion of recurring income, while its pivot to new economy assets are expected to keep earnings stable and future-proof its portfolio.
Shares in CapitaLand close 9 cents or 2.43% higher at $3.80 on March 25.
