Published October 7, 2009

CapitaLand basks in positive spin (-off)

Its shares rise as investors eye special dividend; outlook rosy for CMA too

By UMA SHANKARI

	Email this article
	Print article
	Feedback

(SINGAPORE) CapitaLand shares rose as much as 4.9 per cent yesterday on news that the property group will spin off its $20.3 billion retail portfolio into a separate listed entity.

'Post-IPO, we are likely to see a switch in interest from CapitaLand to CMA.' - Wendy Koh, Citigroup analyst

Shares rose following analyst reports which said that the move was positive for both CapitaLand and the new CapitaMalls Asia (CMA). Many research houses also issued 'buy' calls on the stock and raised their target prices.

However, the news did not go down as well with shareholders of CapitaLand's two retail property trusts - CapitaMall Trust (CMT) and CapitaRetail China Trust (CRCT).

One reason for the warm reception for CapitaLand's shares was a potential special dividend, which CapitaLand said it could pay out post-IPO. The stock gained 8 cents, or 2.2 per cent, to close at $3.75 yesterday.

'The proposed IPO (initial public offering) is positive for the group in the short term given the potential net asset value accretion and special dividend per share,' said Citigroup analyst Wendy Koh.

Depending on the valuations ascribed to the spin-off, CapitaLand could record an exceptional gain on divestment, as well as potentially attract a revaluation of a significant part of the group's asset base, noted JP Morgan analysts Christopher Gee and Joy Wang.

CapitaLand's shares are also trading at around 1.2 times book value at the moment, and there could be some potential for a re-rating if the spin-off allows the underlying business value to become more apparent to the stock market, the analysts added.

The company will also benefit from the capital recycling exercise.

CMA's effective interest in the $20.3 billion retail portfolio (including minority interests in some cases) is $7 billion. The book cost of the properties is $5.3 billion.

Using the net asset value of $5.3 billion, and assuming that CapitaLand chooses to float 20-40 per cent of CMA, about $1.1 billion to $2.1 billion would be raised. This will increase CapitaLand's cash position, lower its gearing and allow it to invest and grow its other core business.

'Assuming a divestment of a 30 per cent stake in CMA at book value, CapitaLand could expand its cash hoard to around $5.3 billion,' said DBS analysts Lock Mun Yee and Derek Tan. 'With a gearing of 0.3 times, it would have an additional $6 billion debt capacity, based on the higher end of the target gearing of 0.5-0.75 times.'

But there are concerns that CMA, which will take over all of the group's retail business - which was widely thought to be the main growth engine for CapitaLand previously - will now be the more attractive option. Said Citigroup's Ms Koh: 'Post IPO, we are likely to see a switch in interest from CapitaLand to CMA.'

The shift in interest could also affect CMT and CRCT. Both stocks were down following CapitaLand's announcement. CMT lost 8 cents, or 4.4 per cent, to close at $1.74, while CRCT shed 2 cents, or 1.7 per cent, to end at $1.17.

'We expect the prices of CMT and CRCT to face some short-term weakness,' said Kim Eng analyst Wilson Liew. 'Shareholders of CMT and CRCT might take a while to digest the impact of the news.'

The main issue, analysts said, is that CMA is a pure retail play, just like CMT and CRCT. Institutional investors in particular might want to re-allocate their funds. 'Some of them might choose to transfer their shareholdings into CMA,' observed an analyst at a brokerage here.