Capitaland: Citi’s take post Ascendas-Singbridge (ASB) acquisition

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Citi’s Take – We provide key investors’ feedback on CapitaLand’s acquisition of Ascendas-Singbridge (ASB) from its attendance at Citi’s 24th Annual Global Property CEO Conference in Miami last week, as well as our marketing in Europe, Hong Kong, Malaysia, Singapore, Thailand and US following the publication of CapitaLand (CATL.SI): A Blessing in Disguise in Feb-19.

Overall, we think the reception is mixed, with positives (valuable industrial platform and boost to asset recycling/RoE) offset by negatives (1.15x P/B paid for ASB, increased complexity of enlarged entity and potential lengthiness of the integration/execution process).

Positive #1

Valuable industrial/logistics/business park (ILBP) platform – Investors expect the ongoing theme of “Long Industrial/Logistics (IL) and Short Retail” to persist over the next 3-5 years, which have resulted in global IL companies trading at premiums to NAV, i.e. Goodman Group (2.41x P/B) and SEGRO (1.02x P/B). At 0.76x P/B, CapitaLand appears undemanding. While we estimate ILBP will contribute 11% of CapitaLand’s GAV post acquisition of ASB (ILBP comprises 67% of S$23.6b managed AUM and 54% of our RNAV), we think this could expand via acquisitions of Singapore, India, Australia and UK assets.

Positive #2:

Boost to asset recycling plans and RoE – ASB’s S$5.3b of investment properties (or ~50% of EV) would enable CapitaLand to accelerate its asset recycling plans as it aims for an 8-12% RoE and asset divestments of ~S$3b/year. AREIT, CCT, AIT and ART would be the beneficiaries. Having achieved 9.3% RoE in FY19, most expect the group to achieve the higher end of the targeted range, helped by ASB’s portfolio last valued in Mar-18. Most agree that S$3b is conservative, given S$4b sold in FY18 and ASB has also divested ~S$0.5b/year.

Negative #1:

Increased complexity – The introduction of ILBP will further complicate CapitaLand’s already-complex business model (currently has residential, retail, commercial, lodging, integrated projects and fund management), which may widen its NAV discount and make it more challenging to value/understand the group. Investors continue to prefer diversifying themselves by picking stocks with their preferred asset classes, instead of the company doing the diversification work.

Negative #2:

Integration and execution efforts may take time – Investors believe integration efforts between CapitaLand and ASB could take some time (at least 6-12 months), hence could be patient and wait for some results before buying the stock. Further, existing CEO – Mr. Lee Chee Koon is relatively new as he was only appointed in Sep-18, though some have observed certain positive changes (albeit marginal) already, particularly in the pace of deal/decision-making. That said, some investors would like to see more, esp. plans for its smaller REITs, overall fund raising structure/pricing for all its REITs and composition of capital allocated to ILBP now that it is part of a larger entity and may compete with other business units.

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