Overall positive for Danga Bay project

51% stake in Danga Bay project in Johor Bahru Malaysia
CapitaLand (CAPL) is taking a 51% stake, alongside Iskandar Waterfront Sdn Bhd (40%) and Temasek (9%), in a JV to acquire and develop a 71.4 acre freehold site in A2 Island, Danga Bay in Johor Bahru (JB), Malaysia. This is the group’s first major Malaysian township development, which is envisioned to be a “premier waterfront residential community comprising high-rise and landed homes,” together with a “central waterfront hub with a marina, shopping mall, F&B outlet/restaurants, serviced residences, office and recreational facilities”.

Estimated to accrete 4 S-cents a share to RNAV
Total GFA is anticipated to be ~11m sq ft, and the project would take place in phases over 10-12 years. On a 100% basis, total land cost is RM811m (S$324m), payable over 4.5 years, and its gross development value is estimated at RM8.1b (S$3.2b). We expect the JV to finance this project with 50%-70% debt, in line with CapitaLand’s general practice, and believe the first series of launches would likely begin in FY15. From our estimates, CAPL’s IRR for this project is likely in the low to mid teens, and this acquisition would accrete S$174m or S$0.04 per share to the group’s RNAV.

Signals of warmer ties between Singapore and Malaysia
We view this development to be a favorable one for CAPL and note the share price has reacted positively since initial headlines yesterday. In particular, this acquisition was in conjunction with the PMs of both Singapore and Malaysia announcing a high-speed railway between Singapore and Kuala Lumpur by
2020, and unveiling details of Marina One, another JV development located in Singapore involving entities from both countries. All three events signal at warmer ties between both countries, ahead of Malaysian elections to be held later this year.

Maintain BUY with fair value estimate raised to S$4.29
Maintain BUY with a higher fair value estimate of S$4.29 (20% discount to RNAV), versus S$4.04 previously, as we incorporate this acquisition into our model and update for valuations of listed holdings.