Tuesday, January 19, 2010

Capitaland - Buy by OCBC (15 Jan 10)

OCBC issued a buy call on Capitaland on 15 Jan 2010. It looks like the special payout might be affected though because of news released on 18 Jan 2010 regarding Capitaland's investment of its IPO proceeds. You can view the other news here.

Shareholders can expect a special payout in 2010. After selling 34.5% of its stake in CapitaMalls Asia (CMA) during its IPO in November 09, CapitaLand (CapLand) successfully raised gross proceeds of S$2.8b from the transaction and part of the proceeds could be paid out as special dividend to shareholders. We estimate that the transaction will generate a one-off net gain of S$936.8m (after deducting the cost of the IPO payable by CapLand). Assuming CapLand pays out 100% of its one-off gain as special dividend, this will translate to a payout of S$0.22 per share and including its regular dividend of S$0.07 per share, a total payout of S$0.29 per share could be expected when CapLand announced its FY09 results, translating to a dividend yield of 6.8%.

Dismissing concerns on holding company discount. After the listing of CMA, investors can now invest in CMA to gain direct exposure to the retail assets held under the CapitaLand group, without the need of going through 2 layers of ownership (i.e. gaining exposure to CMA via CapLand) and the additional layer of management costs. There are concerns that the market may ascribe a holding company discount on CapLand but we disagree with this view. A holding company discount is only applicable when the holding company destroys value or generates no value-add to the subsidiaries or associates, but CapLand still plays an important role in the overall strategy of CMA, providing CMA with access to its wide business network, strong branding and multi-sector expertise.

Fair value raised to S$4.95; maintain BUY. Since our strategy report on 2nd Dec 09, CapLand's share price has underperformed its peers despite the positive developments in the group. While the share prices of its peers gained 13.3% on average, CapLand's share price rose by just 4.9% over the same period. Going forward, the announcements of special dividend and capital deployment initiatives are likely to be the key share price drivers. Following the adjustments made to our valuation model to take into account the market value of CMA, our RNAV estimate has now been raised to S$4.95 per share (previously S$3.72). Pegging our fair value at parity to our RNAV, we derive a fair value of S$4.95 on CapLand (previously S$4.15). With a 16.1% upside to fair value and a potential FY09 dividend yield of 6.8%, we maintain our BUY rating on CapLand.

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