Capitaland - Buy by OCBC (06 Oct 09)

Proposed listing of CapitaMalls Asia. Yesterday, CapitaLand (CapLand) announced that it has obtained a letter of eligibility-to-list to list its whollyowned subsidiary - CapitaLand Retail Ltd on the Main Board of SGX-ST and CapitaLand Retail Ltd will be renamed as CapitaMalls Asia Ltd (CMA). CMA will have an integrated business model across the entire retail real estate value chain and upon the completion of the reorganization exercise, it will have exposure in 86 retail malls (59 operational; 27 under construction) in Singapore, China, Malaysia, Japan and India. Base on pro-forma financial statement, CMA will have total assets of ~S$6.3bn, total debt of ~S$0.5bn and shareholders' equity of S$5.2bn. CapLand remains committed to retain a controlling stake in CMA and plans to sell 20%-30% of its CMA stake to ensure sufficient liquidity.

Special dividend on the cards? The offer price for CMA has not yet been fixed, pending a book building exercise. However, on the assumptions that 1) the offer price is pegged to CMA's book value and 2) CapLand offers 30% of its stake in CMA, CapLand will receive net proceeds of ~S$1.6bn from the IPO, which is approximately 37 S-cents per CapLand share. The proceeds may be paid out as a special dividend to CapLand's shareholders.

Balance sheet to strengthen. Based on the assumptions above without a dividend payout, CapLand's net borrowing will decline by 28% from S$5.6bn to S$4bn, upon the completion of the IPO exercise. Its net debt to equity ratio will thus fall from 0.47x to 0.3x.

Upgrade to BUY; Fair value S$4.15. The financial impact from the IPO of CMA on CapLand is still not quantifiable as it depends on the fixing of the offer price. Nevertheless, we are optimistic over the success of this IPO, given its strong investment theses: 1) exposure to the rising Asia consumerism; 2) mix of completed malls (income generating) and malls under development (capital growth) and; 3) potential to leverage for growth. If the IPO performs well, the offer price of CMA could be pegged above its NAV, which will allow CapLand to recognize a gain from the IPO. In addition, the possibility of a special dividend could also lead to outperformance in CapLand's share price. We maintain our RNAV estimate of S$3.72 for now, but peg our valuation of development projects and investment properties at a 20% premium (no premium previously), in view of the positive development. As such, our fair value of CapLand has now been raised to from S$3.72 to S$4.15. We are now upgrading CapLand from HOLD to
BUY.