CapitaLand - Expect some deck clearing in 2Q09 results

CapitaLand’s 2Q09 headline results to be dominated by “exceptional” writedowns and write-ups. Group 2Q09 results are to be released before market opens on 30 July 09, and we expect a headline loss after tax and minority interest of S$250million (2Q09E loss per share of S5.9cts), comprising core PATMI of S$50million, up modestly Q/Q but substantially below 2Q08’s S$345million excluding revaluation gains. Adjustments to FRS40 should allow some offsetting of impairment charges in 2Q09 amounting to S$600million on our estimates, with a net “exceptional” loss of S$300million booked for the quarter. We expect end 2Q09E book value to be S$2.78/share.

Looking for a strategic update. Economic prospects have improved markedly in a number of the key markets to which the group is exposed, and we would expect some management guidance on whether the group’s risk appetite has changed, particularly with respect to the available liquid capital the group has at the corporate level (S$7.1billion as at end 1Q09, likely still to be around S$6.3billion as at end 2Q09).

Specific stock catalysts should be from strategic M&A options. We expect CapitaLand to trade like a liquid proxy on Asian real estate sectoral growth, with specific stock catalysts dependent on the deployment of the group’s available capital in key geographies, a re-acceleration of growth in real estate assets under management or a re-rating of the group’s China business.

We retain our S$3.80/share Dec-09 price target, based on the average through the cycle 18% discount to our S$4.69/share RNAV estimate. Key risks to our investment case lie in a reversal in the current buoyant liquidity and loose monetary conditions resulting in a rise in the cost of Asian real estate capital; weaker than anticipated growth that limits cap rate compression in the key asset classes to which the group is exposed, or value-destructive M&A by the group.

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