CapitaLand basks in positive spin (-off)

Its shares rise as investors eye special dividend; outlook rosy for CMA too

CapitaLand shares rose as much as 4.9 per cent yesterday on news that the property group will spin off its $20.3 billion retail portfolio into a separate listed entity.

Shares rose following analyst reports which said that the move was positive for both CapitaLand and the new CapitaMalls Asia (CMA). Many research houses also issued ‘buy’ calls on the stock and raised their target prices.

However, the news did not go down as well with shareholders of CapitaLand’s two retail property trusts – CapitaMall Trust (CMT) and CapitaRetail China Trust (CRCT).

One reason for the warm reception for CapitaLand’s shares was a potential special dividend, which CapitaLand said it could pay out post-IPO. The stock gained 8 cents, or 2.2 per cent, to close at $3.75 yesterday.

‘The proposed IPO (initial public offering) is positive for the group in the short term given the potential net asset value accretion and special dividend per share,’ said Citigroup analyst Wendy Koh.

Depending on the valuations ascribed to the spin-off, CapitaLand could record an exceptional gain on divestment, as well as potentially attract a revaluation of a significant part of the group’s asset base, noted JP Morgan analysts Christopher Gee and Joy Wang.

CapitaLand’s shares are also trading at around 1.2 times book value at the moment, and there could be some potential for a re-rating if the spin-off allows the underlying business value to become more apparent to the stock market, the analysts added.

The company will also benefit from the capital recycling exercise.

CMA’s effective interest in the $20.3 billion retail portfolio (including minority interests in some cases) is $7 billion. The book cost of the properties is $5.3 billion.

Using the net asset value of $5.3 billion, and assuming that CapitaLand chooses to float 20-40 per cent of CMA, about $1.1 billion to $2.1 billion would be raised. This will increase CapitaLand’s cash position, lower its gearing and allow it to invest and grow its other core business.

‘Assuming a divestment of a 30 per cent stake in CMA at book value, CapitaLand could expand its cash hoard to around $5.3 billion,’ said DBS analysts Lock Mun Yee and Derek Tan. ‘With a gearing of 0.3 times, it would have an additional $6 billion debt capacity, based on the higher end of the target gearing of 0.5-0.75 times.’

But there are concerns that CMA, which will take over all of the group’s retail business – which was widely thought to be the main growth engine for CapitaLand previously – will now be the more attractive option. Said Citigroup’s Ms Koh: ‘Post IPO, we are likely to see a switch in interest from CapitaLand to CMA.’

The shift in interest could also affect CMT and CRCT. Both stocks were down following CapitaLand’s announcement. CMT lost 8 cents, or 4.4 per cent, to close at $1.74, while CRCT shed 2 cents, or 1.7 per cent, to end at $1.17.

‘We expect the prices of CMT and CRCT to face some short-term weakness,’ said Kim Eng analyst Wilson Liew. ‘Shareholders of CMT and CRCT might take a while to digest the impact of the news.’

The main issue, analysts said, is that CMA is a pure retail play, just like CMT and CRCT. Institutional investors in particular might want to re-allocate their funds. ‘Some of them might choose to transfer their shareholdings into CMA,’ observed an analyst at a brokerage here.

CapitaLand to spin off retail arm and list it

CapitaMalls Asia aims to speed up growth with special focus on China

Singapore’s largest property group CapitaLand will spin off its $20.3 billion retail portfolio into a separate unit, which will be listed on Singapore Exchange.

The group’s retail arm CapitaLand Retail will be renamed CapitaMalls Asia (CMA), and will have a Pan-Asian portfolio of 86 retail properties. The new company will take the lead on all future retail activities while CapitaLand will focus on non-retail businesses.

Announcing the plans yesterday, CapitaLand chief executive Liew Mun Leong said that this was the ‘most important announcement since we were listed 10 years ago’.

He added: ‘I can’t think of any (other) announcement that has had such a big impact on the group.’

CapitaLand said the proposed listing of CMA will allow the group to accelerate the growth of its integrated shopping mall business.

Since 2002, CapitaLand has increased ten-fold the total value of its owned and managed retail property portfolio, from $1.8 billion then to $20.3 billion as at end-June 2009. These malls will now be held by CMA instead.

While the overall portfolio value of the malls in which CMA has a share (including minority interests) as well as it manages is $20.3 billion, CMA’s effective interest in the properties is a much smaller $7 billion. And the book cost of the properties is $5.3 billion.

CapitaLand plans to retain its control over CMA and would be ‘comfortable’ selling just 20-30 per cent of the company in the initial public offering (IPO), chief financial officer Olivier Lim said in a briefing.

This means that CapitaLand should raise at least $1 billion from CMA’s IPO, assuming a 20 per cent float at book cost.

Mr Lim said that it is too early to discuss the valuation of CMA and that the company ‘can be patient’ regarding the timing of the listing. CMA could have an estimated debt-to-equity ratio of 0.3 times to 0.5 times, which would give the company the potential to take on debt of about $1.6 billion to $2.6 billion, Mr Lim added.

This will allow CMA to grow by buying land for new developments or purchasing completed malls, for example.

The transaction will also reduce CapitaLand’s borrowings and raise its cash levels, Mr Lim said.

After the IPO, CapitaLand shareholders could receive a potential special dividend – depending on the gain from the planned listing as well as CapitaLand’s overall cash position, gearing and the business plans and capital requirements of the other business units.

CMA’s portfolio comprises 59 completed malls in Singapore, China, Malaysia, Japan and India. Another 27 properties are currently being developed. More than half of all malls are in China, which is expected to provide the engine of growth for CMA.

‘One of CapitaMalls Asia’s key growth markets will be China, where we have an early-mover advantage, having built up an extensive network of tenants, contacts and knowledge of local market conditions,’ said Mr Liew.

He added that CapitaLand will consider a secondary listing for CMA on another stock exchange, possibly in China, ‘in time to come’.

Analysts were surprised by CapitaLand’s decision to spin off its retail arm into a separate listed entity, but said that the move could pay off for both companies.

The listing of CMA provides much more clarity on the valuation of the overall retail business which today makes up 22 per cent of CapitaLand’s business, said Macquarie analyst Soong Tuck Yin.

‘The announcement is light on details but we think this is positive for CapitaLand because Asian retail is a strong growth area they can capitalise on, and CapitaMalls Asia could provide investors with a direct entry into the high-growth Asian retail business for which there are very few pure-play vehicles,’ he said.

For the two retail real estate investment trusts (Reits) now under CapitaLand Retail, it will be business as usual. The group’s stakes in CapitaMall Trust and CapitaRetail China Trust will be held under CMA in future. Both Reits will continue to enjoy the existing rights of first refusal they have from the group.

CapitaLand also said that its retail real estate fund and Reit management business will be transferred to CMA to create an integrated business model focused in the retail real estate sector.

‘Given that the entire retail real estate business platform is proposed to be spun off in its entirety, there should be very limited impact on the operation/ management of both Reits,’ said JPMorgan analysts Joy Wang and Christopher Gee in a note.

CapitaLand shares were suspended from trading yesterday.