CapitaMalls Asia

Kim Eng on 8 Feb 2012

Initiate with Buy and TP of $1.92. We initiate coverage on CapitaMalls Asia (CMA) with a Buy recommendation and target price of $1.92, which is pegged at a 20% discount to RNAV and implying 38% upside. As more of its malls become stabilised, we expect CMA’s earnings to grow at 18% CAGR over the next five years – no mean feat considering the current uncertain state of the global economy.

Down but not out. Since its initial public offering (IPO) in November 2009 which was 1.7x oversubscribed, CMA has been the worst-performing STI component stock, falling by 34.2% from its IPO price of $2.12 whereas the STI gained 6.4% in the same period. We believe that part of the underperformance was due to CMA’s China exposure, which we estimate currently accounts for 54% of its Gross Asset Value.

Give it time. In our view, CMA’s exposure to China is often misunderstood. China has always been a medium- to long-term objective, considering that most of its malls there are still not completed or stabilised, as was communicated during its IPO. Some investors may have been disappointed by the lack of significant income streams from China, but that is only to be expected because of the longer gestation periods required by malls. As recently as the middle of last year, only about 40% of its China malls (by NAV) has begun operations.

China portfolio to come good soon. We believe that CMA has the necessary expertise and competitive edge to succeed in China. The value proposition of its China portfolio will become more evident and compelling as more malls contribute more meaningfully to its net property income. We estimate that core EBIT (excluding revaluations) contributions from China will grow from a low of 7% in FY10 to 54% in FY16F, assuming that no further acquisitions will be made.

Buy while valuations are cheap. CMA’s current share price suggests that the market has written off its China exposure. We do not think this is justified given that retail sales in China remain very robust. Besides, CMA is still the de facto market leader in Singapore, where we believe that retail malls as an asset class will be the outperformers in the commercial property segment in the next 24 months. Buy now while valuations are still cheap.