CapitaLand - Positioning for growth (KE)

Event

? CapitaLand’s quarterly PATMI continues to be lumpy, with the group announcing an 82.6% fall to $80.2m in 3Q11. Earnings were hampered by higher-than-expected finance costs and administrative expenses, thus falling short of market expectations. Nevertheless, we believe the group remains well-positioned to continue its growth path, having committed to $7b worth of new investments YTD, such as the Jurong Gateway and Bishan Central sites and the redevelopment of Market Street. Maintain BUY.

Our View

? CapitaLand’s 9M11 PATMI stood at $580.7m. While earnings volatility from property development were expected, finance costs crept up on higher costs of borrowing and marked-to-market losses on interest rate swap contracts. Administrative expenses also increased due to a rise in staff costs and professional fees. In addition, profit recognition from Singapore was slower than expected, and we have adjusted our profit recognition assumptions to reflect that, leading to a 23.4% cut in our FY11 forecast.

? Overseas, the projects expected to be completed in 4Q11 include Rihan Heights in the United Arab Emirates, 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 YTD (estimated average margins of >30%). The group remains confident of China’s prospects.

? In Singapore, CapitaLand sold 338 residential units worth $715m during the 9M11 reporting period. Its next launch is expected to be the 583-unit Bedok Residences in 4Q11 and we anticipate an ASP of $1,300 psf on an estimated breakeven of $1,060 psf. More units at The Interlace and the new Bishan Central project will likely be launched 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 for its new launches could serve as a positive share price catalyst. Maintain BUY with a target price of $3.53, pegged at a 10% discount to RNAV.