Capitaland dragged by slower residential activities in Singapor

Highlights
Dragged by weaker Singapore earnings and lower divestment gains. Capitaland reported a 3.4% y-o-y drop in revenue from continuing operations (excl Australand) to S$612.6m while EBIT was a mere 1% lower to S$419.5m, supported by better gross margins and a S$19.1m gain from the earlier sale of its 39.1% stake in Australand. PATMI was 13.3% lower at S$147.4m.

Partly offset by better China residential and mall businesses. Key highlights of 1Q14 results were higher development profits from China with more than 500 units handed over to buyers from the Loft, La Cite and Lake Botanica as well as better contributions from shopping malls from CMA. The Ascott also saw 20% higher EBIT due to better performance from new and existing properties. However, Singapore residential contributions fell 22% y-o-y to S$117.9m, owing to lesser progressive billings with S$87m sales from d’Leedon (84% sold) as well as The Interlace 92% sold) in 1Q.

Our View
Operationally on track. Profits for the rest of 2014 will be boosted by higher performance from Singapore as well as contributions from China. The latest relaunch of Sky Habitat saw
106 units changing hands at between S$1,276-1,590psf. There are plans to market the 124-unit Marine Blue this year. In China, the group is expected to recognise its share of contributions from 8,000 units to be handed to buyers this year. In addition, 6 new projects are expected to be launch ready. Together with new phases from ongoing projects, this should yield another 3,500 units. Raffles City portfolio continues to perform well with higher occupancy and increased retail sales and shopper traffic.

Potential accretion from CMA privatisation. The privatisation offer for CMA is ongoing and if successful, should lift Capitaland’s RNAV. As at 25 Apr, the group has garnered a 70.3% stake in CMA. Post the S$3bn acquisition, Capitaland’s ROE is expected to improve to 6.7% (based on 1Q14) while gearing would increase to 0.56x.

Recommendation
Maintain Buy. We maintain our Buy recommendation on Capitaland. Apart from its growing operations in Singapore and China residential, new contributions from Capitagreen and its S$90m divestment gain from Westgate as well as cost management activities should lift profits in FY14 and FY15. With the recent rationalisation of its stake in Australand and the ongoing privatisation offer for CMA, Capitaland is set to enjoy higher ROEs going forward. Maintain Buy with TP of S$3.85, pegged at a 30% discount to RNAV.