CapitaLand

DBS Vickers Securities on 10 July 2012

ASCOTT Residence Trust (ART) and CapitaLand have announced a series of transactions that will boost ART's exposure in Asia while unlocking value from its asset in Singapore.

ART will sell the Somerset Grand Cairnhill site to CapitaLand for redevelopment, with a put and call option to buy the newly redeveloped serviced component upon completion as well as purchase two properties in China and Singapore from its parent.

The deal worth $688 million would boost ART's exposure in the higher growth Asian markets of Singapore and China to close to 40 per cent, as well as offer immediate positive earnings impact from the stabilised properties.

From CapitaLand's perspective, it will add 25,999 square foot of GFA in the prime Orchard Road location to its Singapore residential land bank. In terms of impact on earnings and target price, the transaction will lift ART's FY12-13 distribution per unit (DPU) by about one per cent initially with more earnings upside from the new serviced residence component when completed in 2017.

In all, we reckon this exercise will lift ART's book net asset value (NAV) by 4.4 per cent to $1.42 and raise target price from $1.14 to $1.29. Post transaction and a small proposed perpetual security issue, ART's gearing would be still manageable at 43.2 per cent. With CapitaLand's larger asset base, the deal should boost FY12 earnings estimates to $684.4 million and raise target price marginally to $3.39, premised on a 35 per cent discount to its asset backing.

We are upgrading our recommendation on ART to "buy" as we like the portfolio's increase into the faster growing Asian region. The deal also provides earnings downside protection through the fixed rent component as well as earnings upside from the variable rent formula. We maintain our "buy" call on CapitaLand for its diversified business exposure.

BUY