Tuesday, May 26, 2009

Capitaland - Overweight by JP Morgan (25 May 09)

CapitaCommercial Trust (CCT) rights issue impact on CapitaLand: 31.4%-owned CapitaCommercial Trust is proposing a 1-for-1 rights issue to raise S$828million. CapitaLand has undertaken to subscribe to its pro-rata entitlement, but unlike CapitaMall Trust’s (CMT) rights offering earlier in the year, the group is not undertaking to subscribe to CCT units in excess of its proportionate 31.4% stake. At the rights issue price of S$0.59 each, CapitaLand's share of the rights issue comes to S$260.4million.

To record proportionate share of CCT’s and CMT’s property devaluations: As part of the rights issue process, CCT (and indirectly CMT for its share of the Raffles City complex) have conducted property valuations as at May 09. We calculate CapitaLand’s share of the property devaluations from CCT and CMT would amount to S$231million to be recorded in the group's 2Q09 results. Note that we have already assumed S$1.6billion of asset impairment charges to be recognized over our forecast period FY Dec 09E-11E.

Writedowns offset by accounting changes. The asset devaluations would be offset in part by potential revaluation gains from investment properties currently under development (following adjustments to FRS40 coming into force in FY09). We have assumed S$125million of revaluation gains primarily from the group's 50% share of ION Orchard retail mall to be recognized, possibly in the 2Q09 results.

Raising our end Dec 09E price target of S$3.80/share (S$3.30/share previously), now based on a 20% discount to our S$4.70/share FY09E RNAV estimate, similar to the share price discounts to NAV at which the Hong Kong developers are currently trading. Key risks to our rating and price target include: (1) a reversal in the current buoyant sentiment to high-beta equities and (2) weaker than anticipated property demand which lowers asset valuations.

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