Should I buy CapitaLand? Here’s what we think | Singapore Stocks Focus
Real estate investment can be simple as playing monopoly. However, it can also turn out to be complicated than investing in stocks because of the financial, legal and due diligence required. Taking into consideration Asia’s booming real estate sector, one Singapore Exchange (SGX)-listed name that comes to mind is CapitaLand.
Headquartered in Singapore, CapitaLand is one of the largest real estate companies in Asia with one of the best asset portfolio and returns to investors. The company harnesses its asset base, design, development capabilities and capital management capabilities to develop high-quality real estate products.
The company’s real estate portfolio is made up of shopping malls, serviced residences offices, homes and Commercial & Integrated developments. Singapore and China are its core markets. However, it also owns assets in Indonesia, Malaysia, and Vietnam, which have emerged as its new growth markets.
CapitaLand also operates one of the largest real estate fund management business in Asia. Its listed real estate investment trusts (REITs) include CapitaLand Mall Trust, CapitaLand Commercial Trust, CapitaLand Retail China Trust and CapitaLand Malaysia Mall Trust.
What makes CapitaLand a unique investment vehicle for Asia’s real estate sector is the fact that it boasts of a diverse asset portfolio. A diverse asset portfolio ensures a diverse earnings base able to spread investors risk over different segments. Downturn in one segment is most of the time offset by outperformance in another sector.
In addition to having a significant asset base, the real estate investment company has an extensive market network ranging from commercial assets to shopping malls that allow it to generate steady rental income. CapitaLand also generates a significant amount of revenues from the business of selling homes, thus able to generate a fortune whenever the industry is doing well.
In China, CapitaLand has exposure to tier 1 cities, such as Beijing and Shanghai, billed as some of the most prominent with booming real estate business. The two cities are financial hubs which means property prices are constantly rising much to the benefit of the real estate company.
In addition, the company is also positioning itself in tier 2 cities which are poised to experience continued growth in future.
The only major risk that investors have to contend with when it comes to investing in CapitaLand is the fact that China and Singapore account for more than 80% of the company’s asset base. The company generates a majority of its income in the two countries, which means a downturn in either the two, could significantly hurt its bottom line.
For instance, property prices were on the decline in 2017 in Singapore as the government stepped to prevent a bubble from forming in the sector. Similar concerns are already building up in China as property prices have moved up quickly over the past few years.
CapitaLand’s historical dividend payouts
CapitaLand has shone to light in the recent past on the fact that it continues to offer consistent returns in the form of distributions. In the recent quarter, the company saw its distribution per unit edge up by 0.7% to 2.9 Singapore cents, from 2.88 Singapore cents paid the previous year. Full-year distribution per unit stood at 10.10 cents compared to 10.05 cents paid out the previous year.
Increased distribution follows a 0.8% increase in income available for distribution to S$102.9 million. During the fourth quarter ended December 31, 2017, the company released S$7.6 million of its taxable income available for distribution retained in the first half.
“In 2017, China’s economy performed better than expected and consumption remains a key economic growth driver. We are positive that CapitaLand Retail China Trust’s portfolio of family-oriented shopping malls is well-placed to tap China’s sustainable growth, rising disposable income and increasing consumer spending,” CapitaLand Retail China Trust Management Chairman Soh Kim Soon said in the statement.
The company’s gross revenue in the quarter rose 1.8% to S$172.4 million as net income increased 2.6% to S$119.3 million. The company attributes the increase to the popularity of its malls that continue to register high occupancy rates of 99.2%
CapitaLand is in the process of divesting its share of interest in a group of companies that holds 20 malls in China. The company will generate about S$1.71 billion from the transaction with the buyers poised to assume about S$296.6 million in outstanding shareholder loans. The malls are located in 19 cities, 14 of which are non-core cities.
The transaction is poised to generate about $660 million in net proceeds and a net gain of about S$75 million. The selloff impact should be significant given that the 20 malls accounted for about 4-7% of CapitaLand respective total and China shopping mall portfolio.
CapitaLand management has however quashed concerns that they are planning to exit China following the divestment. The selloff according to the team will allow the company to refocus its attention away from tier-three cities and pay more attention to tier 1 and tier two cities.
The selloff follows the divestment of Capital Mall Kunshan in the Chinese city of Kunshan late last year. According to the Chief Executive Officer, the selloff is part of ongoing transformative changes to China’s retail industry. The company has also divested six retail malls in India.
The selloff also lowers the company’s risks of retail exposure in addition to unlocking Capital from mature assets. According to the research group, RHB Research, the divestment is a good move for long-term growth as it sharpens the company’s set portfolio in care city clusters.
“In our view, the move clears an overhang on market concerns over its retail assets in Tier-2 & 3 cities amidst the threat of an oversupply and rise in e-commerce. At the same time, the company has been expanding its presence through management contracts, which we believe is the right strategy,” said Vijay Natarajan, an analyst at RHB.
Analysts at DBS Group Research have also echoed their support of the divestment reiterating a buy call on the stock. CIMB brokerage firm has since initiated coverage of the property developer with a $4.25 price target.