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Brokers' take: CapitaLand's mall divestment in China gets thumbs up from DBS, RHB, CIMB

STOCK watchers were happy campers on the news last week that CapitaLand is dropping 20 shopping centres from its retail asset portfolio in China.

Analysts at DBS Group Research and RHB Research Institute Singapore joined the chorus of cheerleaders with "buy" calls on the real estate developer in separate notes on Monday morning.

CIMB analyst Lock Mun Yee had come to the same conclusion in a flash note last Friday, after CapitaLand's announcement.

CIMB held to a target price of S$4.25, while RHB was slightly more cautious, upgrading its take on CapitaLand to "buy" from "neutral" and raising the target price from S$3.90 to S$4.20.

DBS was the most optimistic on the real estate stock, reiterating its previous "buy" recommendation and target price of S$4.35.

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Analysts Derek Tan and Rachel Tan noted that their target price was "ahead of consensus average", which now stands at S$4.24.

Still, they said that they believe this fair-value target "is achievable, given expectations that the group will deliver a robust set of results on the back of strong revaluation gains for its commercial portfolio, and locked-in sales for its residential portfolio".

They called the mall sale a "positive catalyst" and a "good opportunity" that will top up the CapitaLand coffers with capital to invest in higher-yield properties with a longer growth runway.

"Strategy-wise, it appears that the group has chosen to stay out of the current euphoria in the Singapore residential market and focus on investing in its core competencies and recycling its portfolio assets," the DBS team added.

RHB analyst Vijay Natarajan echoed this take.

"One of CapitaLand's concerns has been its limited Singapore residential inventory... with the market at the cusp of a potential recovery," he said.

"While we note that its landbank is running low, we believe its prudent approach makes sense amidst the current intense completion, which has driven up the land costs by 20 per cent to 40 per cent.

"We expect the company to continue to selectively bid for residential land and potentially acquire one or two sites in 2018."

CapitaLand's latest overseas mall divestment, which is expected to yield a net gain of S$75 million, came as part of a strategic decision to shift its focus to first-tier and second-tier cities in the Chinese market.

The move was cheered by analysts.

The CIMB report said of CapitaLand's prospects: "Not only would the reconstituted portfolio offer stronger clustering effect, the sharper geographic focus would enable better resource allocation and economies of scale as well as enhance its capacity to capture growth opportunities in China."

It added: "Income vacuum from the sale of the properties would be more than offset by the growing income contribution from the one million sq m of new retail GFA (gross floor area) completed in 2017, in our view.

"More importantly, it has unlocked value from mature assets for reinvestment into new growth opportunities."

CapitaLand was S$0.07 higher, at S$3.72, as at 9.50am on Monday.

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