CapitaLand may be rising, but here’s why it is still not time to ‘buy’

SINGAPORE (March 1): RHB is remaining “neutral” on CapitaLand while raising its target price to S$3.60 from S$3.15 previously, as it expects limited upside on the stock following the run-up in its share price, which has increased by about 20% in the year-to-date.

In a Wednesday report, analyst Vijay Natarajan reckons there are two reasons for CapitaLand’s outperformance, the first being the real estate company’s focus on asset-light strategies to enhance returns. This includes building up its private real estate funds; expanding its serviced residence and retail portfolio through management contracts; and acquiring accretive income-producing assets.

“While the moves are a step in the right direction, we believe CapitaLand would need a few more years, before it can achieve its sustainable ROE target of 8%-12%,” comments Natarajan.

Secondly, the analyst attributes the stock’s share price run-up to a renewed interest in developers amidst a spate of privatisation talks.

He believes the group’s recurring income is therefore set to receive a boost with contributions from its Ascott acquisitions and the opening of eight retail malls this year, totalling to a record 1 million sq m of retail gross floor area (GFA).

Of the eight malls, three belong to the group’s high-end Raffles City portfolio across key China cities of Shanghai, Shenzhen and Hangzhou, which Natarajan reckons will further boost the group’s recurring income portfolio, which currently accounts for more than about 76% of its total assets.

“Ascott currently has a portfolio of 52,000 units (22,000 still under development). Newly-acquired units are expected to contribute an additional S$25 million (RM78.84 million)-S$30 million in fee income annually upon completion and stabilisation,” he adds.

Nonetheless, the analyst underscores his belief that operation conditions will continue to remain challenging in the group’s core markets, give its management’s caution in replenishing its depleting Singapore landbank.

“Our revised RNAV factors in contributions from acquisitions and a higher valuation for Ascott, as well as its fund management business,” says Natarajan.

“Key re-rating catalysts are the setting up of more real estate private funds, opportunistic M&As and the relaxation of policy measures in Singapore and China. The main upside risk to our forecasts would be early removal of cooling measures; while the key downside risk would be a prolonged real estate slowdown in key operating markets,” he concludes.

As at 11.15am, shares of CapitaLand were trading 1.1% lower at S$3.60. —

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