CapitaLand and CDL's earnings may rebound in 2021, but will that lift their share prices?

FOR CapitaLand and City Developments (CDL), 2020 was a year to forget.

This past week, as both these leading property development groups reported dismal results for their respective FY2020s, they emphasised that they were in good shape to seize new opportunities, and urged investors to focus on the future potential of their businesses.

CapitaLand's chief executive officer Lee Chee Koon said last week that Covid-19 hasn't affected the group's plans to become a globally competitive asset manager and real estate company.

"In 2020, we continued to grow our fund management business, deploy capital into new economy asset classes, and took the chance to digitalise and rationalise our existing business," he added.

CDL's executive chairman Kwek Leng Beng exhorted the market to look beyond the current troubles faced by its China-based unit Sincere Property Group (SPG). "We must now forget about all these old subjects," said Mr Kwek, during the company's results briefing. "We must look forward."

Yet, as this column has noted previously, both CapitaLand and CDL had been major long-term underperformers, even before Covid-19 came along.

During the 10-year period to end-2019, shares in CapitaLand returned 16.2 per cent while shares in CDL returned 11.1 per cent. The Straits Times Index returned 54.3 per cent during the same period.

Has the tough year they endured in 2020 changed anything? Will they demonstrate any improvement in profitability and growth prospects in 2021 beyond the cyclical recovery that is already underway?

"New economy" pivot

When CapitaLand unveiled its plans two years ago to acquire Ascendas-Singbridge from Temasek Holdings, it sold the deal to minority investors by saying they would become shareholders of a much larger and more diversified property group, without having to come up with any money or suffering reduced dividends.

CapitaLand delivered what it promised. Even though it paid for Ascendas-Singbridge partly by issuing new shares to Temasek priced at a discount to net asset value (NAV), it held its dividend per share for FY2019 at the same level as for FY2018 and FY2017 - that is, 12 cents per share.

With its expanded share base, CapitaLand actually paid out about S$100 million more in absolute terms for FY2019 than FY2018. But it was easily able to afford this.

For FY2019, CapitaLand reported profit after taxes and minority interests (Patmi) of S$2,135.9 million, up 21 per cent versus FY2018.

For FY2020, however, CapitaLand reported a net loss of S$1,574.3 million. The group's NAV fell to S$4.30 per share, its lowest level since FY2016.

No doubt, much of this deterioration in profitability was non-cash in nature. CapitaLand recognised revaluation losses of S$1,636.7 million for FY2020, and impairments of S$861.4 million. For FY2019, the group had recognised revaluation gains of S$674.7 million, and impairments of S$31.6 million.

But CapitaLand's operational performance was weaker too.

Backing out all the impairments and revaluation gains and losses, CapitaLand would have achieved Patmi of S$923.8 million for FY2020 - or some 38 per cent less than the S$1,492.8 million that would have been achieved for FY2019.

Further stripping out divestment gains of S$153.9 million for FY2020, and S$435.6 million for FY2019, CapitaLand's operating Patmi came in at S$769.9 million for FY2020, or 27 per cent less than the previous year's S$1,057.2 million.

Not surprisingly, CapitaLand slashed its FY2020 dividend to 9 cents per share.

Looking ahead, a cyclical recovery appears to be already underway, with CapitaLand reporting markedly stronger earnings in H2 2020 versus H1 2020. The group also plans to continue pivoting towards "new economy" property assets, such as business parks and logistics centres.

Yet, CapitaLand's exposure to these new economy properties remains limited at the moment - at just 8 per cent of its assets. By contrast, its exposure to retail property and offices, which are susceptible to technology disruption and shifting work habits, account for 32 per cent and 24 per cent of its assets, respectively.

This could make it hard for investors to get excited about CapitaLand in the short term. The stock ended Friday at S$3.18, or some 26 per cent below its book value.

Impetus to unlock value?

CDL faces similar dynamics as CapitaLand, except that much of the impairment losses it suffered in FY2020 relate to its recent initiatives - such as its investment in SPG last year and its privatisation of Millennium & Copthorne Hotels in 2019.

For FY2020, CDL reported Patmi of minus S$1,917.4 million, versus Patmi of S$564.6 million for FY2019. The group also registered a pre-tax loss of S$1,790.8 million, compared to a pre-tax profit of S$754.1 million the previous year.

This deterioration in profitability largely reflects substantial provisions for CDL's most pressing problem.

As at end-2020, the group's exposure to SPG totalled some S$1,827 million, comprising its equity investment of S$806 million, its holding of bonds issued by SPG worth S$305 million, other receivables worth S$433 million and corporate guarantees of S$283 million.

CDL has recognised impairment losses totalling S$1,701 million on its exposure to SPG, including its entire equity stake and all its corporate guarantee.

On top of that, CDL has recognised impairment losses of S$99.5 million for its hotels and investment properties, and a further S$35 million for foreseeable losses at its development projects.

Without impairment losses or write backs, CDL would have reported pre-tax profit of S$120.5 million for FY2020 compared with S$805.5 million for FY2019.

The big question now is how quickly CDL will be able to set SPG on a firmer financial footing, and have it begin generating positive returns. Worryingly, Mr Kwek indicated last week that SPG's founder and chairman, Wu Xu, has a different view than officials at CDL on how to take the Chinese company forward.

Nevertheless, CDL has firmly indicated it will not provide further liquidity support directly to SPG. It did, however, announce the acquisition of SPG's stake in Shenzhen Longgang Tusincere Tech Park last week.

Meanwhile, the slump in the hotel business is prompting CDL to consider unlocking value from its hospitality portfolio. "Covid-19 has given us greater impetus to review our entire privatised M&C portfolio, with a view to unlocking the intrinsic value of the group's RNAV (revalued net asset value) at the right time," Mr Kwek said in a statement last week.

With the big reported loss for FY2020, CDL's NAV was knocked down to S$9.38 per share as at end-FY2020 - its lowest level since FY2014. If CDL had factored in fair-value gains on its investment properties and the revaluation surpluses of its hotels, its RNAV would be S$16.88 per share.

Shares in CDL closed Friday at S$7.36, or a seemingly tempting 56 per cent discount to its RNAV.

CDL intends to pay dividends totalling 12 cents per share for FY2020, down from the 20 cents per share it paid for FY2019 and FY2018.

With continued uncertainties about Covid-19, and the headwinds of technology disruption and changing work habits, the possibility of aggressive value unlocking initiatives at CDL could prove more enticing to investors than CapitaLand's continued pivot towards new economy assets.

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