At an ROE of 10%, CapitaLand would have to make net profit of around $2.3 billion, given its shareholders equity of $23 billion, give or take, and total equity of $39 billion. The higher CapitaLand’s net profit, the more capital would accrue to its shareholders equity because companies put aside retained earnings, or revenue reserves.
Investors have often wondered why seemingly undervalued stocks never seem to get off the ground. Hongkong Land is a prime example of this. Why can’t the stock price narrow the discount between its price and its net asset value (NAV)?
In March this year, CapitaLand’s management gave the market a partial answer. CapitaLand trades at a discount to NAV, and its management had an aim to narrow this discount. For several years, the developer — soon to be restructured — focused on ROE. The stated target was 8%. In 2018, this was raised to 10%.
