Published February 11, 2009

CapitaLand rises, CMT falls after rights issues

By UMA SHANKARI

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CAPITALAND and its listed retail trust CapitaMall Trust (CMT) announced massive rights issues on Monday.

But while CapitaLand's $1.84 billion one-for-two rights issue has been well-received by analysts and the market, CMT's $1.23 billion nine-for-10 rights offer has not fared as well.

Analysts rushed to issue 'buy' calls on CapitaLand after the developer said it was raising money to boost its war chest to $6 billion as it searches for acquisitions. CMT, on the other hand, was criticised for an 'unwarranted dilution'.

The market seemed to agree yesterday. CapitaLand shares gained 11.4 per cent or 27 cents, to close at $2.63. But CMT lost 6.2 per cent or nine cents to close at a one-year low of $1.36.

Merrill Lynch upgraded CapitaLand to 'buy' from 'underperform', while OCBC Investment Research upgraded it to 'buy' from 'hold'. CLSA, Kim Eng, UBS Investment Research and UOB-Kay Hian all reiterated 'buy' calls too.

'We believe the cash raised provides CapitaLand with the financial flexibility to ride through challenging property markets, enhance market positioning and, more significantly, the ability to take advantage of opportunistic acquisitions,' Merrill said.

A few firms were less bullish. Citigroup, CIMB and Nomura maintained their respective 'sell', 'underperform' and 'reduce' recommendations. Citigroup said the rights issue will be a drag on CapitaLand's return on equity.

Goldman Sachs, which has a 'neutral' call on the company, said the rights issue is sufficient to address investor concerns over book value erosion from land bank provisions and associated asset value declines (from listed trusts), which Goldman estimates could be around $1.9 billion spread over the next two or three years.

'With the sizable rights offering, we see no further need for capital raising in the next two years into the downturn, as the company has said it plans to revisit project commitments,' said Goldman analysts Paul Lian and Natasha Parchani.

A successful rights issue would refocus attention on CapitaLand's capacity to benefit from the current market environment as it is more likely than its peers to generate net asset value growth in the next two or three years, the analysts said.

Reviews for CMT's $1.23 billion rights issue were more mixed. The trust intends to use the bulk of the proceeds to pay off $956.2 million of debt due this year.

CLSA downgraded CMT from 'outperform' to 'underperform'. In contrast, OCBC upgraded the stock from 'hold' to 'buy'.

'While the proceeds will help the company repay debt and lower gearing to 29.1 per cent (from 43 per cent currently), we see the rights issue to be rather value dilutive,' said CLSA analyst Yew Kiang Wong. The cost of retired debt, at 3.4 per cent, is much lower than the cost of equity, CLSA noted.

But OCBC analyst Foo Sze Ming said the rights issue is not driven by refinancing issues and is instead for the 'long-term sustainable growth of CMT's portfolio'.

'By paring its gearing level now, CMT will have better financial flexibility to take on opportunities for asset enhancement initiatives and acquisitions in future,' Mr Foo said.