CapitaLand got a boost from its China properties in 4Q but will it last?

SINGAPORE (Feb 16): UOB Kay Hian and OCBC Investment Research are maintaining their “buy” calls on CapitaLand with a target price and fair value of S$4.05 and S$3.68 respectively.

Likewise, CIMB is retaining its “add” recommendation on the stock with a raised target price of S$4.19 from S$4.15 previously.  

This comes after the real estate developer on Wednesday posted a 74% increase in 4Q earnings to S$430.5 million on the back of improved operating performance, where its FY2016 core net profit either met or exceeded the estimates of all three research houses due to higher-than-expected residential profits from its China properties.   

The group also proposed a final dividend of 10 Singapore cents per share.

“We like the fact that the company has delivered a balanced set of results in an uncertain environment due to its diversified asset portfolio and robust recurring income streams,” comments OCBC lead analyst Eli Lee, who deems the group’s latest set of results to be “fairly healthy” with its second consecutive year of record sales in China.

While analysts from UOB and CIMB acknowledge that the group has seen strong financial performance in 4Q, both research houses also concur that an additional S$161 million (RM505.62 million) gain from the recycled capital of CapitaLand’s sale of The Nassim will bode well for its FY2017 results with recognition in 1Q2017.

CIMB’s Lock Mun Yee and Yeo Zhibin have hence adjusted their FY2017F EPS to factor in the sale in addition to stronger rental income growth from newly completed properties.

At the same time, UOB analysts Vikrant Pandey and Derek Chang say that CapitaLand’s expansion of its footprint in growth market, Vietnam, is also likely — even as the group’s focus remains on the core markets of Singapore and China despite headwinds.

Maybank Kim Eng, however, begs to differ.

In its latest report on CapitaLand on Wednesday, the research house has downgraded its rating on the stock from “buy” to “hold” while raising its price target to S$3.66 from S$3.46 previously.

This is because Derrick Heng, an analyst at Maybank, is expecting the group’s home sales momentum in China to moderate in the year ahead given CapitaLand’s sales target of 8,000 units for 2017 compared to the 10,700 units sold in 2016.

Instead, the research house has chosen UOL Group as its preferred “buy” pick in the sector with a target price of S$7.39.

“[CapitaLand’s] 4Q2016 [performance] was ahead of our and market expectations due to stronger-than-expected profit recognition from China. Nonetheless, the 6.7% ROE achieved for FY2016 remains below its target range of 8%-12%,” explains Heng, who believes the group may need to optimise its capital structure by raising its leverage on stabilised assets and increasing its share of trading assets.

“With the completion of major projects over the next few years, we see more capital being released for redeployment and will watch this area to assess the stock’s outlook. However, high land prices in its core markets, China and Singapore, have made finding accretive projects tough,” he adds.

As at 11.03am, shares of CapitaLand are trading 0.9% lower at S$3.46, while UOL Group is down 7 Singapore cents at S$6.61. — theedgemarkets.com.sg

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