Developer-sponsor model at work - Macquarie

Event


 CapitaLand announced the proposed divestment of 28 serviced residence properties, mainly in Europe, to its 47.7%-owned listed associate Ascott Residence Trust (ART SP, S$1.23, Neutral, TP: S$1.20) for S$970m. This is consistent with its strategy to divest stabilised assets to its listed REIT
vehicles. Net cash proceeds of S$332m will be used to capture new investment opportunities. Outperform maintained.impact

 Transaction highlights. The EBITDA yield of the assets to be divested is circa 5.7% vs ART’s current EBITDA yield of 5.5%. ART will fund via a combination of equity and debt and expects DPU accretion in FY11 of 3.0% to 6.6%, depending on the price of the equity to be raised. CapitaLand will subscribe to ART’s fund-raising to maintain its 47.7% stake.

 Acquiring Ascott Beijing from ART. CapitaLand will pay S$214m for this asset with GFA of 64,155 sqm at Rmb23,000/sqm. The group intends toenhance and re-position the asset for future strata-title sale as residential units. Selling prices for new projects in the Chaoyang district are in excess of Rmb40,000/sqm, although the selling price for CapitaLand will have to be adjusted for shorter length of lease left and taxes.

 Small net gain at group level but lowers gearing at The Ascott Limited (TAL). CapitaLand will realise a gain of S$52m on completion of the divestment expected by year-end. More importantly, the transaction will lower TAL’s gearing from 60% to 27%, providing this SBU with financial capacity to help reach its target of growing its portfolio from 26,546 units currently to 40,000 units by 2015.

Earnings and target price revision

 No change to EPS forecasts and no change to target price.

Price catalyst

 12-month price target: S$4.80 based on a Sum of Parts methodology.
 Catalyst: Further investments in the retail, residential and serviced apartment sectors over the next six months. Action and recommendation

 We believe CapitaLand’s businesses are firing on all cylinders. With a low gearing of 28%, we expect new investments in its key retail, residential and serviced apartment SBUs to help drive RNAV expansion. The shares are trading at a 24% discount to our RNAV of S$5.34. Outperform with potential upside in excess of 20%.