The shares of CapitaLand Limited climbed by as much as 4.9 percent Tuesday driven by news that the real estate company will be spinning off its retail portfolio worth $20.3 billion into a separate SGX-listed entity.
CapitaLand’s shares rose after analyst reports said that spin-off was beneficial to both CapitaLand and CapitaMalls Asia, the new business entity. Many analysts issued calls for “buy” on the stock and also increased their target prices.
However, the news about the spin-off was not warmly welcomed by shareholders of CapitaRetail China Trust and CapitaMall Trust, CapitaLand’s retail property trusts.
A reason why CapitaLand’s shares were received warmly was a possible special dividend, which the real estate giant said it can pay out after initial public offering (IPO). The stock rose by or 2.2 percent, or ¢8, and closed at $3.75 Tuesday.
”The proposed IPO is positive for the group in the short term given the potential net asset value accretion and special dividend per share,” Wendy Koh, an analyst at Citigroup, said.
Depending upon the valuations attributed to the said spin-off, CapitaLand may record an exceptional divestment gain, as well as possibly draw a reappraisal of a significant portion of the firm’s asset base, explained JP Morgan analysts Joy Wang and Christopher Gee.
CapitaLand’s shares are trading at approximately 1.2 times their book value as of this writing, and there may be some probability for a re-rating should the spin-off allow the rudimentary business value to be more evident to the stock market, added the analysts.
The firm will also be benefiting from the recycling of its capital.
CapitaMalls Asia’s effective interest in the retail portfolio, including its minority interests, is $7 billion. The properties’ book value is $5.3 billion.
Using the $5.3 billion net asset value and presuming that CapitaLand opts to float 20-40 percent of CapitaMalls Asia, approximately $1.1 billion to $2.1 billion will be raised. This will cause CapitaLand’s cash position to increase and its gearing will be lowered allowing the firm to invest and develop its other core business.
”Assuming a divestment of a 30 per cent stake in CMA at book value, CapitaLand could expand its cash hoard to around $5.3 billion,” DBS analysts Derek Tan and Lock Mun Yee said. ”With a gearing of 0.3 times, it would have an additional $6 billion debt capacity, based on the higher end of the target gearing of 0.5-0.75 times.”
There are concerns, however, that CapitaMalls Asia, which will be taking over all of CapitaLand’s retail business, would now become the more attractive choice. “Post IPO, we are likely to see a switch in interest from CapitaLand to CMA,” Koh said.
The shifting of interest might also affect CapitaRetail China Trust and CapitaMall Trust. Both stocks dropped after CapitaLand’s announcement. CapitaMall Trust lost ¢8, or 4.4 percent, and closed at $1.74, while CapitaRetail China Trust lost ¢2, or 1.7 percent, and ended at $1.17.
”We expect the prices of CMT and CRCT to face some short-term weakness,” said Wilson Liew, an analyst at Kim Eng. ”Shareholders of CMT and CRCT might take a while to digest the impact of the news.”
The core issue is that CapitaMalls Asia is purely a retail play like CapitaRetail China Trust and CapitaMall Trust, explained analysts. Institutional investors particularly may want to have their funds reallocated. “Some of them might choose to transfer their shareholdings into CMA,” an analyst observed.