Capitaland Group (DBSVickers)

CapitaLand : Pan Asian residential, commercial, hospitality and industrial property owner, developer and manager.
CapitaMalls Asia Limited : CMA is one of the largest listed shopping mall developer, owner, operator, asset manager and fund manager in Asia
Capitamall Trust : Real estate investment trust with a portfolio of major shopping malls located in suburban areas in Singapore

The West Side Story
• Land acquisition to strengthen landlord value proposition in the Jurong East locality, long term positives from entrenching position in Jurong Lakeside regional hub
• Immediate valuation accretion modest with greater longer term upside coming from on operational synergies and as location matures
• Maintain Buy for CMA, CMT and Capitaland

Entrenching presence in Jurong East. Our recent site visit to CMA/CMT/ Capitaland’s Jurong Gateway site at Boon Lay Way has reaffirmed our view that this acquisition is a strategic defensive move on their part to deepen exposure in the upcoming Jurong Lakeside regional hub area and further strengthen their positioning as a major landlord within this enclave in the medium term. Jurong Lakeside regional hub is expected to grow to 2.5x that of Tampines regional hub with a sizeable working and resident catchment. This is likely to have positive impact on property values in the longer run.

Enhancing landlord value proposition with a slew of offerings. Growing their presence in the locality to an estimated 1msf retail NLA is likely to enhance their landlord value proposition and improve their ability to be rental price makers rather than takers in the medium term. The group plans to offer a range of offerings with IMM targeted to be a value-focused mall, JCube an entertainment focused positioning and Jurong Gateway site a family lifestyle shopping complex, to enhance shopper experience in the vicinity. With the latter site to be seamlessly integrated and highly accessible to nearby amenities and transport nodes, we expect pedestrian traffic to be high in the malls. JCube is on track to open in early 2012 while the retail portion of the new Jurong Gateway property is expected to be operational by Dec 2013, in tandem with the Lend Lease development.

Near term accretion mild but expect significant upside in the medium term. We maintain our Buy calls for CMA, Capitaland and CMT as we see this deal as being accretive and represent a deployment of balance sheet capacity into higher yielding opportunities. Immediate impact on valuations is likely to be mild with an initial yield on cost of c5.9-6% but we believe upside can be generated as the regional hub matures and as operational synergies kick in. Our RNAV and TP for CMA are raised by 1ct to $2.29 and $2.51 respectively on new contributions from its 50% stake. Capitaland’s RNAV remains unchanged at $5.43 due to its small 20% share. Capitaland offers value as one of the big-cap laggards trading at 0.94x P/bk and 0.6x P/RNAV. For CMT, our DCF-backed TP is lowered slightly to $2.05 due to a small near term earnings dilution 0.5-3% on increased interest expense during the development period. When completed in FY14, the new income could boost DPU by 3-4%. CMT is currently trading at FY11 and FY12 DPU yields of 4.9-5.4%.

Deepening presence in Jurong Our site visit to the recently acquired Jurong Gateway white site by CMA, CMT and Capitaland has reaffirmed our view that this acquisition is a strategic defensive move on the group’s part to retain its dominant positioning within the Jurong East and Lakeside area as well as leveraging into the potential of this area with the upcoming development of Jurong Lakeside regional hub.

To recap, CapitaMalls Asia (CMA), CapitaMall Trust (CMT) and CapitaLand was awarded the Jurong Gateway white site at Boon Lay Way. The group put in a top bid of $969m or $1,012psf ppr, which is just 5.7% higher the second bid put in by United Engineers and Singapore Press Holdings and about 23% premium over the third bid put in by Keppel Land and Perennial Real Estate. Other bidders include consortium involving Far East Organization, Seksui House and China State Construction as well as Frasers Centrepoint. The site is the second land parcel to be released for sale at Jurong Gateway, following the successful sale of the first white site at Jurong Gateway Road to Lend Lease in June 2010 at $749m or $650psf ppr.

The 195,465 sf site has a plot ratio of 4.9x and can house a potential GFA of 957,781sf. Under the guidelines, a minimum 40% is to be set aside for office use, while the 60% can be retail, hotel or residential use.

The group intends to build a 5-storey mall and a 20-storey block of office building. Total development cost is expected to work out to $1.5b. CMA will hold 50% stake of the venture while CMT and CapitaLand will take a smaller 30% and 20% of the pie respectively.

We reckon the project can generate total rental revenue of $110-115m or 5.9-6% yield on cost based on our assumption of an average rent of $17psf/mth for the retail component and $6.50psf/mth for the office portion. The retail component is scheduled to be operational by Dec 2013 and the office component by Dec 2014.

A prime suburban location that cannot be ignored We think the land price paid is fair given the longer term outlook for the Jurong Lakeside area. The land parcel is a prime site located next to the Jurong East MRT station, in the heart of Jurong Gateway, which is the key commercial hub within the Jurong Lake District. The area is a long term development initiative that was unveiled back in Master Plan 2008, which is expected to be eventually built up into a major regional centre for the west of Singapore and 2.5x that of the Tampines Regional Centre. In the longer term, Jurong Lakeside could potentially house more than 3,000 multinational and global businesses and at least 1,000 new homes.

Currently, there is already a large population catchment of more than 1m residents in the surrounding towns like Clementi, Bukit Batok, Jurong East and Jurong West. Coupled with the relatively younger population and higher than national average monthly disposable income, we see potential for a successful suburban shopping and commercial precinct.

Strengthening its foothold in the Western Part of Singapore

More importantly, it is in the vicinity of its existing malls - IMM and JCube. With this acquisition, the group is expected to have about 1msf of retail space and 2,200 car park spaces in Jurong. Together with Lot One Shopping Mall, Bukit Panjang Plaza and the upcoming Star Vista (Buona Vista development), the group will deepen their foothold in the Western Part of Singapore.

High footfalls expected

The mall, located next to Jurong East MRT station (an interchange with two major train lines) and Jurong East Bus Interchange, will have 5 access points. We expect the shopper traffic to be high as level 1 of the mall will be linked directly to the new air-conditioned Jurong East bus Interchange, while both Level 1 and Level 2 will be linked to the Jurong East MRT Station. It is estimated that the Jurong MRT and Bus Interchange throughput commuters is about 1.3m and 0.5m/mth. In addition, the two link bridges, which will connect the new complex to the upcoming Ng Teng Fong Hospital and Lend Lease's mall, will create a larger "integrated development", thus enlarging the catchment area.

Complement not compete

The plans unveiled by CMA and CMT have further reaffirmed our view on management’s retail asset management capabilities. The strategy to offer a slew of niche shopping experiences in the 3 malls would create a complementary environment and provide operational synergies in the area. We understand that Lend Lease has secured several large anchor tenants, which include a hypermarket, cinema and food court facilities for their adjoining development. Hence, CMA/CMT intends to focus on securing speciality tenants which will make up 70% of the tenant mix with mini-anchors tenants taking up the remaining 30%. This will enable them to generate a higher average rental rate and boost returns from this develeopment.

Creating certainties in the tenant mix for the other malls

In addition, securing the new mall will give the group more certainties in planning the tenant mix for JCube and IMM and the upcoming Lend Lease's mall, at the same time lower competition. The group intends to position the new mall as a family and lifestyle mall, while IMM Building with Giant Hypermarket and plans to expand the 13 outlet stores to 30 as a value-focussed mall. JCube with its Olympic-size ice skating rink and extended operating hours will be the entertainment complex. We believe that the "3-in-1" mall will create synergy in terms of operations and leasing, resulting in cost savings in the longer term.

Office population adds to catchment pool According to URA 1Q/2011 data, Jurong East and West planning area collectively houses about 1msf of private and public office space at present but is still 35% lower than the office stock in the Tampines planning area. Furthermore, we believe that most of the office buildings are much older or have been taken up by public agencies. Hence, there is a need for more quality office space in Jurong. Occupancy rate for Jurong West and East in 1Q11 stands at 91% and 93% respectively, higher than the islandwide average of 88%. The Ministry of National Development had announced earlier that it has taken up 315,382 sf of office space at Lend Lease's building. With more Statutory Boards and MNCs looking at decentralize locations, we believe that the office component of the Jurong Gateway site can help to fill the gap.

Valuation and recommendation

We maintain our Buy calls for CMA, Capitaland and CMT as we see this deal as being accretive to the companies’ valuations and represent a deployment of balance sheet capacity into higher yielding opportunities.

In terms of impact, we expect this development to add 1ct to CMA’s RNAV to $2.29 and lift TP to $2.51. Given the group large balance sheet capacity and a net cash position of $250m as at end 1Q11, the group is well-placed to utilize its strong balance sheet to fund its share of $750m of development cost. From CMT’s perspective, this development exercise is likely to be RNAV accretive but near term earnings may be diluted by 0.5-3% due to the increased interest expense during the development period. Post 2014, DPU is expected to be boosted by 3% with new contributions from this project. Gearing would rise to c41% with the addition of its share of $500m development cost.

Our valuation for Capitaland remains unchanged after accounting for this development given the group small 20% stake. Our TP remains at $4.61, based on a 15% discount to RNAV of $5.43.