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Willie Keng, CFA

Willie Keng, CFA

Chief Editor

CapitaLand Restructuring 2021: Is It Worth Buying Now?

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The guys at CapitaLand (SGX:31) are smart financiers. 

Ever since I’ve started investing in 2010, I’ve observed how CapitaLand always traded.

Mostly “sideways”, but never going up.

I used to own CapitaLand’s shares and hardly made any money from it. 

Even though this company has grown in many ways as Singapore’s top property giant, its share price never performed…

Source: Yahoo! Finance

Up until its most recent restructuring. 

The lesson I learnt, is because the market don’t like that CapitaLand carry huge “project cycle risks”.

I’ll explain.

Property projects are massive — integrated developments, townships, urban projects — and take a long time to complete. 

In contrast, when you own investment properties or a basket of them through REITs, you get to collect rental income straightaway.

This means, investors have to wait for a long time, sometimes at least even three years before they even get their returns.

If the projects hit a crisis like the Covid-19 pandemic, the projects’ value fall and investors’ risk losing their money.

And the market doesn’t like this.

That’s why many Singapore developers tend to trade at a “discount” to their stock’s book value (see table below).

Book value simply tells me what a company is truly worth to the investor. And you calculate this by taking total assets minus all the company’s total liabilities. 

Source: Business Times, 24 March 2021

A client once asked me, “Willie, why don’t you like these developers, aren’t they cheap right now?”

You see, when a property developer’s shares trade for less than the company’s book value, investors might think shares are “cheap”.

But that’s precisely because of the huge project cycle risks. 

 

Here’s why CapitaLand’s management is smart

CapitaLand has thus decided to privatize the “riskier” development business. 

And at the same time, this Singapore property blue-chip puts all of its six public REITs and more than 20 private funds into a newly-formed listed company called CapitaLand Investment Management, or CLIM. 

Now, CLIM will manage all the public REITs — CapitaLand Integrated Commercial Trust, Ascendas REIT, Capitaland China Trust, Ascott REIT, Ascendas India Trust and CapitaLand Malaysia Mall Trust — and its private funds. 

So, CLIM will own some of the world’s most recognized brands like The Ascott, which is a trophy asset of CapitaLand.

 

CLIM is the new Brookfield Asset Management of Asia

Here’s where it gets even more interesting.

You see, CLIM wants to follow exactly the world’s biggest investment managers — Blackstone Group with US$620 billion assets under management (AUM) and Brookfield Asset Management with US$600 billion AUM. 

Think about it. A newly restructured CLIM can now focus on growing its properties to manage, without ever worrying about money “locked up” in long term development projects.

The business model for CLIM is simple. It takes a fee for managing assets, including from the six listed REITs. 

The more assets it manages, the more fees CLIM collects.

But what’s more important is this — Unlike a developer, CLIM doesn’t need to put in its own capital to invest in properties. 

It can always raise money from other people to buy properties, then collect a management fee on the assets it manages.

It’s exactly the same as how our Global Logistics Properties used to do operate warehouses last time. Until it got sold off. 

This is also called an “asset-light” model. It’s much safer for CLIM, since it only manages assets and collects a fee.

If the restructuring is successful, CLIM — at S$115 billion AUM — will be Asia’s biggest property investment management company, and the third largest listed property investment management business in the world.

 

I’m an existing shareholder of CapitaLand, what would I do?

If you ask me, well, I think CLIM is a good business.

The problem is it’s much harder to value the newly-formed company because of the other private funds it manages, which are not readily disclosed to the public.

This means, even if the book value of CLIM is worth S$2.82 per share, it could trade above or even below it in the future.

For me, I’d hold this shares till the restructuring is complete, at least it allows me to “unlock” the S$4.10 per share (turn to page 10 of the PDF for the money breakdown) that CapitaLand’s stock would have never hit. 

But I wouldn’t buy CapitaLand shares today, since the upside here isn’t great, and in my opinion. 

Diligence premium members can access all my profitable trade ideas here.

Sometimes, investing can be simple.

Always here for you, 

Willie Keng, CFA
Founder, Dividend Titan

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Willie Keng, CFA

Willie Keng, CFA is the founder of Dividend Titan, a financial publication for self-managed investors. A former research analyst for top private banks, Willie today runs his own consulting firm. Some of his clients include asset managers and family offices. Willie has a deep passion for helping everyday investors take control of their financial future. And has spent over 10,000 hours researching, analyzing and recommending investment ideas.

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