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5 Takeaways From CapitaLand 2Q14 Briefing

Based on its closing price on 8 August, 2014, CapitaLand is one of the largest property companies listed on the Singapore Exchange with a market capitalisation of $14.3 billion.

The firm’s business spans across the residential, commercial, hospitality and retail segments worldwide.

The company has four other listed-subsidiaries, namely, Ascott Residence Trust, CapitaCommercial Trust, CapitaMall Trust, CapitaRetail China Trust.

In its recent financial results announcement, CapitaLand’s 2Q14 revenue fell 13.2 percent to $875.3 million due to lower sales from its development projects in Singapore and China.

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On a brighter note, profit for the quarter grew 14.5 percent to $438.7 million. The rise was attributable to higher fair value gains of investment properties, the absence of $10.1 million in impairment losses and better operating performance of projects held by associates in China.

While past results may help predict a company’s future, an investor must be aware of the upcoming challenges the firm may face. Here are five things I have learnt from CapitaLand’s 2Q14 earnings briefing.

Headwinds In Singapore Residential Market
Since Ben Bernanke, the former Federal Reserve chairman, hinted a possible quantitative easing tapering back in May 2013, global economies have begun bracing themselves for a higher borrowing-cost environment.

In the local property scene, the government introduced a slew of cooling measures to address rising residential housing prices. Additionally, developers have to complete development of the housing project and sell all the units in it within five years from the date of contract to buy the site or face further charges.

This has impacted property developers negatively. Notably, CapitaLand slashed the prices at its Sky Habitat’s relaunch, an iconic condominium development in Bishan, by 10 to 15 percent to entice buyers to whip out their cheque books.

While management was coy on the outlook of the Singapore residential market, they offered guidance that the firm would time its future residential launches to the prevailing market conditions.

Large Recurring Income Make-Up
As at 30 June, 2014, CapitaLand’s total assets by effective stake came in at $31.6 billion. Singapore and China made up about 43 percent and 39 percent of the assets respectively.

Out of the total assets, about a quarter is held in residential projects while the remaining is spread across commercial and integrated developments, retail malls and serviced residence.

This means that three-quarters of CapitaLand’s revenue is recurring in nature. This would offer some support in the event the firm faces difficulties offloading its residential properties at favourable prices.

Potential Upside From Ascott
The Ascott, a serviced residence owner-operator, has about 24,000 operational units in Asia Pacific, Europe and the Gulf region contributing about $126 million in fee income.

It also has about 11,800 units under development in the pipeline. This would bring the total units owned/managed by Ascott to approximately 35,800 units when they are fully developed.

The pipeline units are expected to lift Ascott’s fee income by $45 million once operational.

A key takeaway was that majority of the $45 million is expected to go into the bottom line as related cost are being incurred at the present moment, and it is not expected to rise substantially once the new units are operational.

Healthy Project Pipeline
On the commercial front, all eyes are on CapitaGreen, a 40-storey Grade A office sitting in the heart of Singapore’s Central Business District (CBD).

The building boasts a net lettable area of about 700,000 square feet (sqf) and it is the only office building being completed in the CBD in end-2014.

As of 11 August, 2014, CapitaGreen has secured 23 percent of lease commitment and is expected to attain a 50 percent lease commitment rate before its completion.

In the residential markets, CapitaLand has approximately 2.6 million sqf in gross floor area lined up in Singapore and 7,500 units ready to be launched in 2H14 in China.

In addition, its China mixed-developments have about 2.3 million square metres in the pipeline. This represents about 75 percent of its construction floor area of mixed-developments in the country.

Comfortable Debt Level
In light of the cash and debt used to privatise CapitaMalls Asia, CapitaLand’s net-debt-to-equity has risen from 0.4 to 0.6 while its interest coverage ratio has improved from 5.7 to 6.1.

When probed, management did not provide a specific target but assured the audience that they would look to credit ratings by agencies such as Moody’s and Standard & Poor’s for guidance on the appropriate debt level.

However, at this current juncture, with a cash balance of $2.5 billion, management felt that the firm was in a comfortable position.

SI Research Takeaway
In view of the challenges faced by property players in the Singapore residential market, companies may look elsewhere to maintain or improve its turnover.

In the case of CapitaLand, its large recurring income base and potential upside from Ascott could be the solution to weather the storm.

Disclaimer:The author has a stake in CapitaCommercial Trust.



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