Published October 29, 2009

Trump card for CapitaLand in CMA

By KALPANA RASHIWALA

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CAPITALAND'S third-quarter report card released this week was a marked improvement from its showing in the first two quarters of this year. Still, the $167.2 million net profit that it achieved for the first nine months of this year is a far cry from the $1.18 billion in the same period last year.

However, plans to float a stake in its integrated shopping centre business under CapitaMalls Asia (CMA) by the year-end could add handsomely to CapitaLand's fourth-quarter and full-year bottom lines.

CMA has a net asset value of $5.3 billion but assuming that its assets are valued at 1.5 to two times book value during the initial public offering (IPO), the total market worth of CMA would be about $8-10 billion. If CapitaLand floats a stake of 30 per cent, the pre-tax profit that it stands to book from the IPO could be in the order of $800 million to $1.4 billion.

CapitaLand's management has indicated that the board may consider recommending a special dividend to shareholders following CMA's flotation.

UBS Investment Research, in a recent paper, estimates that assuming an $8 billion valuation for CMA and a 30 per cent free float, the special dividend would work out to 27 cents per CapitaLand share if it decides to pay out 50 per cent of the IPO proceeds, and 54 cents per share assuming a 100 per cent payout.

On a $10 billion valuation for CMA and a 40 per cent free float, the payout could range from 45-90 cents per share.

Since CapitaLand announced its plans earlier this month to float CMA, its share price rallied about 21.5 per cent to a high of $4.46 on Monday, although it has given up much of the gain, ending at $4.15 yesterday.

By UBS's calculations, an $8-10 billion valuation for CMA will add 61 cents to $1.06 to its revalued net asset value (RNAV) per share for CapitaLand, which it estimates at $4.30 based on CMA's $5.3 billion book value. By launching an IPO, a higher value will be placed on the CMA business than if it remained as an unlisted part of CapitaLand. Or as CapitaLand's management has put it, its plans to float CMA will 'unlock shareholder value by crystallising the value of CapitaLand Group's integrated shopping mall business'.

CapitaLand shareholders stand to gain by approving the group's plans to float CMA. No doubt it will also be good for members of its management, whose pay packets should benefit from a stronger bottom line. And not to forget JP Morgan, the sole financial adviser.

However, some CapitaLand shareholders may also hold stakes in CapitaMall Trust (CMT) and CapitaRetail China Trust (CRCT), which many analysts reckon may fare less favourably after CMA is listed.

CMT may face short-term price weakness from asset reallocation to CMA, as UBS says. The process has already begun. CMT's unit price has slipped from $1.82 before the announcement on CMA to yesterday's closing price of $1.60.

CMA, with a portfolio of 86 malls in China, Singapore, Malaysia, Japan and India, may be more appealing to investors than CMT - which has a presence only in Singapore. CMA's free float market cap could rival CMT's. Still, CMA could find it worthwhile to sell assets, such as its 50 per cent stake in ION Orchard, to CMT given the tax transparency that CMT, as a real estate investment trust (Reit), enjoys in Singapore. In other words, if ION remains in CMA, the income from the mall will be taxed at the corporate tax rate (at the vehicle or CMA level). If however, ION is sold to CMT, the mall's income will be exempt from payment of corporate tax at the Reit/vehicle level, under the tax flow-through allowed for Singapore Reits.

So CMA will retain an incentive (from the viewpoint of this tax saving at least) to develop, warehouse and sell assets to CMT - pretty much the arrangement that now exists between CapitaLand and CMT.

However, this may not be the case for CRCT. That's because CRCT does not enjoy tax transparency since its income is derived from the ownership of malls in China, where it has to pay taxes on the income before it can bring it to Singapore.

This being the case, there could be less incentive for CMA to offload its China malls in future to CRCT. In fact, it may diminish or extinguish the raison d'etre of CRCT.

When CapitaLand floated CRCT in December 2006, it had planned to grow its initial $690 million portfolio of seven malls in China to $3 billion by end-2009. So far, it hasn't been very successful. Today, its portfolio comprises eight malls worth $1.2 billion.

Who knows, CapitaLand could eventually privatise CRCT and let its China malls business sit entirely in CMA. This could provide a nice exit for CRCT shareholders.

These are some questions that CapitaLand shareholders who also own units in CMT and CRCT may ponder as they vote tomorrow on CapitaLand's plans to float CMA.