CapitaLand's pursuit of heft and diversity is not working; it's time to separate growth from value

CAPITALAND has been trying to reposition itself to benefit from the growth of e-commerce and the knowledge economy. But it isn't getting much credit for its effort.

In the wake of Covid-19, the market seems firmly focused instead on the risks of its legacy exposure to shopping malls, offices and serviced residences.

With the benefit of hindsight, CapitaLand's controlling shareholder Temasek Holdings may well have been better off had it not decided to inject Ascendas-Singbridge into the company two years ago.

On Monday, shares in CapitaLand tumbled after announcing negative earnings guidance for FY2020. The stock closed at S$3.27, down 3.82 per cent for the day.

It closed Tuesday at S$3.24, down a further 0.92 per cent.

CapitaLand said in a filing on Friday that it expects to report a loss for FY2020.

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Operating profit after tax and minority interests (Patmi) might come in as much as 30 per cent below the S$1,057.2 million chalked up in FY2019, the company said.

Cash Patmi, comprising operating Patmi and portfolio gains, is expected to fall as much as 45 per cent short of the S$1,492.8 million reported the previous year.

CapitaLand went on to state that it expects to recognise fair value losses in the range of S$1.55 billion to S$1.65 billion as compared to a gain of S$674.8 million in FY2019.

The company also expects sharply higher impairment losses in the range of S$800 million to S$900 million, versus S$31.6 million in FY2019.

"The fair value and impairment losses are non-cash in nature, and principally stemmed from the extraordinary events relating to the Covid-19 pandemic that materially affected the CapitaLand group's business during FY2020," the company said in the Friday filing.

"The CapitaLand group's operating and financial performance continues to recover, improving in H2 2020 as compared to H1," the company added.

Yet, it remains unclear if the improved operating performance Capita-Land experienced in H2 2020 will be sustained through FY2021.

In the first place, rates of new Covid-19 infections have picked up around the world resulting in fresh restrictions on movement.

More importantly, trends such as e-commerce and work-from-home, which took off on the back of Covid-19 last year, may not subside much because of the gains in productivity and cost savings that have been realised by some businesses.

This could mean continued pressure on CapitaLand's profitability and net asset value (NAV), even when Covid-19 infections eventually abate.

Repositioning to grow

CapitaLand has made big strides in recent years diversifying away from segments of the real estate sector in danger of falling victim to technological disruption, and gaining exposure to sectors for which change is likely to be a tailwind.

Its most significant move was arguably the acquisition of Ascendas-Singbridge from Temasek for S$6 billion in 2019.

The transaction -- which CapitaLand partially funded by issuing new shares priced at a steep discount to NAV -- gave it exposure to logistics properties and business parks, and turned it into a much larger and more diversified group with some S$123 billion in assets under management.

Since then, the group has also merged its two flagship real estate investment trusts - CapitaLand Mall Trust and CapitaLand Commercial Trust, which had separately focused on shopping malls and offices - to create CapitaLand Integrated Commercial Trust (CICT).

With a larger and more diversified portfolio, CICT is expected to be better able to raise funds and support CapitaLand's development of integrated commercial projects.

The group is also repositioning CapitaLand Retail China Trust (CRCT) as its key securitisation platform for non-lodging assets in China.

CapitaLand said in November that it is aiming to expand its exposure to "new economy" assets in China over the next few years to S$5 billion from S$1.5 billion. These assets would include business parks, logistics properties and data centres.

CRCT is targeting to have 40 per cent of its portfolio devoted to integrated development, and a further 30 per cent invested in "new economy" assets. The remaining 30 per cent would be invested in retail properties.

Languishing stock

CapitaLand has little to show for all these initiatives though.

Its shares have performed relatively poorly over the past decade, delivering a total return of just 15.2 per cent (dividends reinvested) since the end of 2010. The Straits Times Index has returned 29.9 per cent over the same period.

Much like other major developers, CapitaLand's shares are also trading at a big discount to NAV. At its last close, the stock was at a 31.5 per cent discount to its NAV as at June 30 of S$4.73 per share.

The sell-off it suffered earlier this week demonstrated that CapitaLand is still susceptible to any bad news related to its legacy assets and businesses that may emerge in the months and years ahead.

To be clear, none of this is a criticism of the quality of CapitaLand's assets or management. On the contrary, its assets are close to the best in their respective classes and the company is run by highly competent professionals.

Yet, there is clearly little investor appetite for the group in its current form.

CapitaLand should perhaps consider a restructuring that separates its growth-oriented assets such as logistics and data centres from its value-oriented assets such as shopping malls, offices and serviced residences.

Indeed, looking back now, Temasek might have been better off had it pursued a public listing of Ascendas-Singbridge and taken CapitaLand private, instead of allowing one to acquire the other.

In this fast-changing and uncertain world, companies need clear, growth-oriented stories to win over public investors.