Analysts bullish on CapitaLand deal

INVESTORS and analysts gave the thumbs up to CapitaLand's $3.1 billion acquisition of a Chinese property firm by sending the giant developer's shares up 2 per cent yesterday.

The counter added eight cents to close at $4.36 with 42.1 million shares changing hands, more than double the average daily volume of 18.3 million seen in the past six months, while market experts raised their target price for the stock.

Investors and analysts have been galvanised by news that CapitaLand is buying the property arm of Hong Kong-based shipping and logistics giant Orient Overseas International. The all-cash deal is believed to be the largest property transaction in Singapore's history.

While the bidding process started last November, analysts said the deal came together quickly this month when CapitaLand was invited to submit an offer alongside four other bidders.

The deal will soak up much of the cash it has been sitting on since the successful initial public offering of CapitaMalls Asia last November.

CapitaLand will acquire seven sites in Greater Shanghai and Tianjin, doubling its China property portfolio to 2.8 million sqm in the process. The transaction will also increase its China assets from 28 per cent to 36 per cent of its total business.

While the deal is large, analysts said the value was fair given that CapitaLand is buying properties ready to build in prime sites. It will also put the developer on firmer footing in China's growing property market.

'The acquisition represents... a significant milestone in its commitment for China to account for a considerable 45 per cent of total assets,' said DMG Partners analyst Brandon Lee, who raised his target price of the stock to $5.18.

Mr Lee added that CapitaLand still has up to $4.4 billion in debt leeway for further acquisitions before it breaches a net gearing of 0.6 times.

OCBC Investment Research analyst Foo Sze Ming raised his target price to $5.30 while maintaining a buy call.

'CapitaLand's financial position still remains strong after the acquisition. While hopes of a bumper special dividend may be gone, we believe that this disappointment can be overcome by the potential profits these new projects can bring in,' he said.

But some analysts raised the issue of a property bubble in China which has already prompted regulators to adopt a slew of cooling measures.

One Hong Kong-based analyst said Orient Overseas' decision to sell could have been prompted by uncertainty in the mainland property market.

But OCBC's Mr Foo said CapitaLand has the financial strength to hold on to the land through any near-term uncertainty.

Source: Straits Times, 20 Jan 2010.