CapitaLand — A Solid Stock. One of the biggest real estate company…
By: Syazwan Sultan
Tags: Investment, Investing, Singapore, Stock Market

One of the biggest real estate company in Asia, and certainly the biggest in Singapore by Market Capitalisation, CapitaLand is definitely a household name that has ventured far beyond our little red dot. This is a good stock to own and here are the reasons.

Strong Fundamentals

FY2019 Annual Report

From the 5-year financial summary above, the company has performed well in increasing its profitability and revenues. Revenues have grown 30% in the past five years, with every single year registering a growth except for 2017, due to accounting adjustments in SFRS. EBIT grew 118% while profit attributable to shareholders grew 28%. This illustrates the Group’s strong operating performance over the past five years. EPS has also grown 86%. ROE grew to 10% in FY2019, the first time it reached double-digit figure, while return on total assets grew to 5.8% in FY2019. This is testament to the business’s productive use of its capital. Its ordinary dividend has also increased steadily from 9.0 cents per share in 2015 to 12.0 in 2019, supported by a dividend cover increase from 2.8x in 2015 to 3.9x in 2019, indicating a good and stable reward for stock owners.

In terms of balance sheet, the acquisition of Ascendas-Singbridge (ASB) has caused the Group’s net debt to increase significantly. Total borrowings increased almost 100% in the past 5 years. While this may be concerning, I feel this increase is not yet problematic but necessary to finance future growth. Debt-Equity ratio looks to have increased much more modestly (around 31%) while net debt to total asset ratio increased roughly 7% in the past 5 years, indicating a modestly controllable capital mix. Furthermore, the interest cover and service ratio has also steadily inched higher over the past 5 years. Investment Properties remain the biggest line item of the Group’s assets at around 48 billion for FY2019, with “Associates” being the second biggest item at around 12 billion. There is no significant intangible asset to contend with, which provides some measure of comfort.

2. Good Business Model & Positive Long-Term Trends

The business model of the group is also sensible. Below is a breakdown of the Group’s revenues by business units, asset class & geographic location.

FY2019 Annual Report

A significant portion of revenues (71%) are derived from Singapore and China, with China’s size almost twice that of Singapore’s. It also derives its revenues to a lesser extent from developed markets and emerging markets like India. Around 61% of the revenues are also derived from residential and retail segment, indicating a tilt towards of consumer-driven portion of real estate, while enterprise-driven segments like commercial, business park, industrial and logistics are rather in the infancy stages of growth. The ASB acquisition is hoped to power the Group’s growth in that latter aspect. An analysis of the EBIT and Asset breakdown reveals the same takeaways.

The Group should look at increasing the contribution of its other geographies other than China, which contributed a disproportionate amount to the business now. This is understandable now given that the company is Singapore-based when it started and the most natural market to expand to is China, given its size and economic stage of development. Having said that, it must now look at strengthening the business further by diversifying beyond China, even while China remains a growth market for the company.

One of key trends underpinning growth in real estate development around the world is urbanization. As cities increase in size and number, and as more people move to cities, the demand for real estate will be strong across retail, residential, commercial and hospitality.

Another key trend is the increasing appetite for real estate investments from the largest institutional investors across the world. These sovereign wealth funds, pension funds and insurance companies sit on a ton of money that needs to be put to worked. In a low interest-rate environment, investors are hungry for real estate investment solutions managed by managers with a strong track record in real estate and can generate good returns. CapitaLand recognize this opportunity. Their CL Financial business segment (which is the real estate investment management arm of CapitaLand) now contribute only 4.8% to Group’s revenues. This segment has already seen strong growth in Aum to 73 billion in 2019 and are targeting to increase this number to 100 billion by 2024. For the group, beyond diversifying their revenue streams, fund management fee income also tends to be more stable in nature, which is a strong plus in as cyclical a business as real estate.

One of the long-term headwinds faced by property developers, especially those that derive a significant portion of their income from retail assets, is the virtualization of retail. The rise of e-commerce is only exacerbated by the recent pandemic. The closure of Robinson’s is a case study in this regard. Nevertheless, there are countermeasures to take, first of which is the reimagination of retail. Shopping malls need to reinvent themselves and offer shoppers what they cannot get from a click of a button at home. They need to be more experiential and social in nature. The recently opened Funan mall, developed by CapitaLand, is a good example. Sub-urban malls will also be relevant but need to pivot towards more basic offerings. The second prong of approach need to focus on the logistic real estate asset class because there is no stopping the increasing use of online shopping in the years ahead. Property developers can benefit from this trend by providing the warehousing and logistical real estate solutions to support this trend.

Another aspect that CapitaLand may need to focus on to power future growth is the digitalization of its business model. It needs to leverage more on digital solutions in property development, data analytics and operational needs. As a leading player in the industry, it has the opportunity to be digital trailblazers and set the bar for all to follow.

3. Attractive price and yield

Yahoo Finance

The stock is also trading at one of its lowest given the pandemic cloud and cyclical stocks have taken a beating in 2020. With positive vaccination news globally, there are signs of cyclical rotation as shown by the recent spike in its price. It is still an attractive entry point. It also has an attractive forward dividend yield of around 3.7%. This is a good time to overweight this stock ahead of the anticipated recovery in 2021 and beyond.