CapitaLand

OCBC on 25 June 2012

Last Friday, CapitaLand (CAPL) announced that its President and CEO, Mr Liew Mun Leong, would retire in 12 months. Mr. Liew has already served two extensions and we believe his retirement is not a surprise. We believe current prices represent an attractive proposition at 0.75x book and 0.62x our RNAV estimate. In our view, the share price has likely baked in excessively pessimistic expectations for Chinese residential ASPs and capitalization rates. Moreover, CAPL’s diversified exposure and a solid balance sheet (S$6.0b in cash and a benign net gearing of 31%) point to a significant degree of resilience, in terms of earnings and liquidity, even in our bear case scenario of a wide-spread economic crisis. Maintain BUY with an unchanged fair value estimate of S$3.21.

CEO to retire in 12 months
Last Friday, CapitaLand (CAPL) announced that its President and CEO, Mr Liew Mun Leong, would retire in 12 months. A Board Succession Committee would review internal and external candidates and it is understood a successor could be named in as soon as three months. Mr. Liew has already served two extensions and we believe his retirement is not a surprise. In addition, with a significant 12-month notice period, this is likely to have limited impact on the share price.

China still key driver of share price
While CAPL is widely diversified geographically and across different property segments, its Chinese exposure, making up the largest 38% component of assets, constitutes a key driver of the share price. We have seen a challenging environment for residential sales in China over the last two quarters, with only 350 units sold in total, and a take-up rate of ~65% of units launched. Going forward, we expect this to continue in FY12 but believe conditions in China have likely reached a trough in terms of prices and volume, barring a wide-spread macro shock. In Singapore, about 25% of the 509-unit Sky Habitat has been sold at a median psf ~S$1.6k, which underscores a difficult market for units at price quantums above the S$1.0m range.

Maintain BUY - attractive risk-reward
We believe current prices represent an attractive proposition at 0.75x book and 0.62x our RNAV estimate. In our view, the share price has likely baked in excessively pessimistic expectations for Chinese residential ASPs and capitalization rates. Moreover, CAPL’s diversified exposure and a solid balance sheet (S$6.0bn in cash and a benign net gearing of 31%) point to a significant degree of resilience, in terms of earnings and liquidity, even in our bear case scenario of a wide-spread economic crisis. Maintain BUY with an unchanged fair value estimate of S$3.21.