Maintain BUY
Previous Rating: BUY
Current Price: S$1.305
Fair Value: S$1.67
Priced for upside. We believe CMA’s price underperformance to date is due to a growth-heavy portfolio of uncompleted malls, which involves significant operational uncertainty over a lengthy gestation period, and market concern of a hard-landing scenario in China. After re-examining these drivers in relation to our investment thesis, we believe that there is still upside from current prices. Our investment thesis for CMA rests on two parts. First, capital recycling ahead - after its recent capital deployment of S$950m for Hongkou and Minhang, our numbers suggest that CMA can potentially recycle capital if more acquisition opportunities arise. This implies mature asset sales and likely divestment gains ahead. Secondly, underlying fundamental value - we examine the potential effects of a Chinese hard-landing scenario on CMA’s value and judge that the market has overly discounted the price for a bear scenario.
Capital recycling ahead. CMA recently announced planned acquisitions of additional 50% stakes in Hongkou and Minhang Plaza for S$950m. By our calculations, this increases the amount of CMA’s total outstanding capital commitment to S$2.1bn currently. Working off the balance sheet as of end 2Q11, we estimate that CMA has current available capital of S$2.0bn (S$1.2bn cash + S$0.8bn debt-headroom) assuming a debt-equity target of 30%. This implies CMA can potentially recycle capital if it wishes to continue on an active acquisition stance. Looking forward, we see possible divestments of the Orchard ION or mature Chinese malls to CMT or other parties.
Overwrought about Chinese hard-landing. We examined the break-down of gross asset value, by cities, of CMA’s property assets on a “look-through” basis and found the highest exposure to Singapore (52%), and then Shanghai (20%) and Beijing (6%). We then investigated the impact of the last crisis (FY08-09) on retail assets in these key cities and judge that retail capital values in Singapore, Shanghai and Beijing could fall 30%-40% in the event of a prolonged crisis. Using a scenarioweighted framework with 20% likelihood of a Chinese hardlanding, we derived a fair value estimate of S$1.67 for CMA. In addition, we put the current market valuation against our framework and observe that the current price roughly translates to a 60%-80% likelihood of a bear scenario – which is overwrought in our view.
BUY CMA – priced for upside. We reiterate our BUY rating on CMA with a revised fair value estimate of S$1.67 based on a scenario-weighted sum of the parts (SOTP) methodology, versus S$2.09 previously. Possible upside catalysts are divestments of mature assets, further acquisitions and recalibration of market expectations for a Chinese hard-landing.
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