CapitaLand (KimEng)

Event

CapitaLand’s quarterly PATMI continues to be lumpy, after the group announced an 82.6% fall in 3Q11 PATMI to $80.2m. We believe the earnings were below market expectations, hampered by higher-than-expected financing costs and administrative expenses. Nonetheless, the group remains well-positioned for its growth path, having committed to $7b worth of new investments YTD. Maintain BUY.

Our View

CapitaLand’s 9M11 PATMI stood at $580.7m. While earnings volatility from property development were expected, financing costs were higher in the wake of higher costs of borrowing and marked-to-market losses on interest rate swap contracts. Higher administrative expenses were also incurred due to higher staff costs and professional fees. Profit recognition from Singapore was also slower than expected, and we have adjusted our profit recognition assumptions, leading to a 23.4% reduction in our FY11 forecast.

Overseas, the projects expected to be completed in 4Q11 include Rihan Heights in the UAE, Phases 1 and 3 of The Loft in Chengdu and a portion of The Beaufort in Beijing. In 3Q11, CapitaLand sold 409 homes worth RMB611m, accounting for 26% of its total home sales in China year-to-date. The group maintains its belief and confidence in China’s prospects.

In Singapore, CapitaLand has sold 338 residential units worth $715m during the 9M11 reporting period. The next launch is expected to be the 583-unit Bedok Residences in 4Q11 and we expect an ASP of $1,300 psf on an estimated breakeven of $1,060 psf. CapitaLand is also likely to launch more units at The Interlace and the new Bishan Central project in 1Q12.

Action & Recommendation

CapitaLand has already exceeded its full-year investment target of $5-6b, but it remains in sound financial position should new investment opportunities arise. We believe the warm reception to its new launches could serve as positive catalysts. Maintain BUY with a target price of $3.53, pegged at a 10% discount to RNAV.