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Profits Dip At CapitaLand

Capitaland_logo Real estate group CapitaLand Limited (SGX: C31), or CapLand for short, released its third quarter earnings this morning and saw quarterly profits stumble.

The company has four main businesses after a reorganisation in January this year: CapitaLand Singapore; CapitaLand China; CapitaMalls Asia Limited (SGX: JS8); and The Ascott Limited, represented partially by CapLand’s near-50% ownership of Ascott Residence Trust (SGX: A68U).

Most of the company’s real estate businesses in Singapore and China involving residential, commercial, and industrial properties are handled by CapitaLand Singapore and CapitaLand China respectively. Meanwhile, retail malls across the entire geographical reach of CapLand are overseen by CapitaMalls Asia, likewise with serviced residences and The Ascott Limited.

Some basic numbers

For the three months ended 30 Sep 2013, CapLand’s revenue increased by 53% year-on-year to S$1.05b. Unfortunately, profits couldn’t keep up and slipped 9% to S$136m.

The company’s overall revenue growth was led by top-line improvements from CapitaLand Singapore, CapitaLand China, CapitaMalls Asia, and higher sales from development projects in Australia and Vietnam.

CapitaLand Singapore’s revenue grew 4.1% year-on-year to S$252m mainly due to revenue recognition from projects such as Urban Resort Condominium, Sky Habitat and Bedok Residences.

CapitaLand China recognises revenue on a completion basis and so, when more apartment units were delivered to buyers in the quarter, the business unit saw its revenue triple to S$306m compared to a year ago.

The listed entity CapitaMalls Asia Limited saw its revenue drop 10% to S$91.8m in the third quarter. But as a business unit with CapLand, it saw revenue grow 21% to S$121m on the back of revenue recognition from the Bedok Residences project and contributions from retail malls Olinas Mall and The Star Vista.

CapLand’s other business unit, The Ascott Limited, saw its revenue drop 5.2% year-on-year to S$106.5m due to the absence of one-off fee income and revenue from property divestments.

So, while most of CapLand’s businesses clocked in higher revenue, the company’s expenses had rose dramatically. Its cost of sales grew 93% to S$774m, accounting for a 4.1% dip in gross profits from S$285m to S$274m.

Lower portfolio gains, along with the ballooning of cost of sales, resulted in CapLand’s dip in profits.

Operational highlights and the balance sheet

In Singapore’s residential market, CapitaLand Singapore saw strong year-on-year growth in unit-sales for the quarter; 468 units were sold compared to 70 in the previous year, representing a 569% increase.

In China, the number of units sold had decreased, though “[year-on-year] sales remains healthy.” CapitaLand China sold 707 units in the quarter, a decline of 22% from a year ago.

Some key operational metrics for CapitaMalls Asia can be found here and lastly, The Ascott Limited reported a slight increase in revenue per available unit (RevPAU) to S$124 for the third quarter this year compared to the corresponding figure of S$123 a year ago.

Real estate companies operate in a cyclical and capital intensive industry. The capital intensive nature of their business requires such companies to leverage themselves. The cyclicality of real estate, on the other hand, can put over-leveraged companies into trouble if their managers aren’t alert enough to the industry’s ebb-and-flow.

Thus, the onus is on investors to keep an eye out for changes in the balance sheets of real estate companies and determine for themselves, if they’re comfortable with the amount of leverage being heaped on.

On that front, CapLand’s balance sheet has improved slightly from a year ago using the total-debt-to-equity metric as a basis for comparison; it has fallen from 73.8% to 71.7%.

Despite the small improvement, it’ll also be good for investors to know that total debt has increased from S$14.2b to S$14.5b while cash on hand has inched up from S$5.37b to S$5.61b.

What’s next for CapitaLand

In Singapore, the company “believes that the demand for new homes and offices will remain positive” due to a “resilient Singapore economy and policies to support population growth.” To capitalise on that demand, CapLand will continue to invest in well-located sites to build up a pipeline of residential and commercial developments.

Over in China, the company is “positive about the property market” there as the country’s economy stabilises. According to CapLand, structural changes in China’s economy aimed at delivering sustainable growth are still intact and will provide growth opportunities for the company in the future.

In addition, CapitaMalls Asia’s long-term growth is likely to be supported by a secular trend of healthy consumer demand and economic growth in countries like Singapore, China, and Malaysia. CapLand’s retail-mall business unit has 20 new malls slated to begin operations by 2015 in those countries and more, further strengthening its presence in the regions where it has business interests.

Not forgetting The Ascott Limited, it would continue improving its portfolio through both asset enhancement initiatives and new investment opportunities Asia and Europe.

In short, much of CapLand’s future rides on the real estate market and economy of Singapore and China. It might serve investors well to keep abreast of developments in those areas.

Valuation

The market doesn’t seem too impressed with CapLand’s results as it opened at S$3.12 for a 1.3% decline from Wednesday’s close while Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), saw a dip of only 0.4%.

At CapLand’s opening price, its shares are valued at 0.8 times book value and 14 times trailing earnings, and carry a dividend yield of 2.2% based on its pay-out last year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.