CapitaLand

(Sept 11: $3.60)

UPGRADE TO OUTPERFORM. We believe an enlarged portfolio post-acquisition of Ascendas-Singbridge (ASB) provides fresh impetus for CapitaLand’s (CAPL) capital recycling efforts, while enhancing the potential for portfolio gains. While CAPL’s net gearing rose to 0.73x as at 2Q2019, its highest levels since 2003, we are confident management will reduce net gearing to a target of no more than 0.64x by December 2020. Based on our analysis, we believe off-balance-sheet divestments at a premium to carrying values provide the largest deleveraging impact, with divestments to Ascendas REIT likely. We expect the master developer approach to be a game changer for Singapore developers, with Kampong Bugis slated for a December 2019 launch. Post-acquisition of ASB, we raise CAPL’s FY2019-FY2021E EPS 0% to 3%. A higher price target of $4.10 (from $3.90). At a 27% discount to revised net asset value (RNAV) and 0.80 P/BV, valuations look attractive, and we expect CAPL’s discount to RNAV to narrow going forward, as it delivers sustainable returns in excess of its cost of equity. —