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CapitaLand’s Profits Slip 8.7%

Real estate group CapitaLand Limited (SGX: C31), or CapLand for short, released its fourth quarter and full year earnings for 2013 yesterday. Formed in November 2000 as a result of the merger between DBS Land and Pidemco Land, it is one of Asia’s largest real estate companies.

CapitaLand’s business is a multinational one, being engaged in Australia, Europe, and the countries of the Gulf Cooperation Council, though its main focus is on 2 geographical markets – Singapore and China.

CapitaLand Limited’s listed entities include Australand Holdings (listed in Australia), CapitaMalls Asia (SGX: JS8), Ascott Residence Trust (SGX: A68U) and four real estate investment trusts (REITs). Those REITs are namely: CapitaCommercial Trust (SGX: C61U), CapitaMall Trust (SGX:C38U), CapitaRetail China Trust (SGX:AU8U), and CapitaMalls Malaysia Trust (listed in Malaysia).

Some basic numbers

For the three months ended 31 Dec 2013, Capitaland’s revenue dipped by 2% year-on-year to S$1.085 billion but net profits were down significantly by 43.7% to S$220 million. The large decline can be primarily attributed to a 639.4% hike in operating expenses due to several reasons:

1) Losses from the sale of a 20% stake in Australand ($120.8 million) and Technopark@Chai Chee ($12.6 million). For the most part, the loss from Australand was a combination of realization of foreign currency translation losses and hedging reserves of $137.8 million.

2) Higher impairment and foreign exchange losses. The Group has made an aggregated impairment provision of $80.9 million (up from $22.4 million in the fourth quarter of 2013) mainly in respect of its investments in China, India, Abu Dhabi and Australia. The total foreign exchange losses for the quarter were S$15 million as compared to S$4.5 million in the previous year. Out of the S$15 million, $13.9 million was incurred when CapitaLand sold its Australian-dollar-denominated divestment proceeds for Singapore dollars.

On the other hand, the company had a healthy overall revenue growth of 20.5% for the whole financial year from $3.30 billion to $3.98 billion, propelled by top-line improvements from its various subsidiaries. Unfortunately, EBIT (earnings before interest & taxes) couldn’t keep up and declined by 11% to S$1.798 billion.

The drop in EBIT was mainly due to divestment losses (compared to a gain last year) and higher impairments. Meanwhile, higher operating profits and fair value gains from the revaluation of CapitaLand’s investment properties had helped to mitigate some of that negative impact on EBIT.

All told, CapitaLand’s for 2013 came in at S$849.8 million, some 8.7% lower than in 2012.

Operational highlights and the balance sheet

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, it is wise for 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, CapitaLand’s balance sheet has improved significantly from a year ago with the repurchase of convertible bonds and the deconsolidation of Australand in 2013. Its net debt (total debt minus total cash) was trimmed down from S$8.7 billion in 2012 to S$6.7 billion as of 31 Dec 2013.  As a result, Capitaland’s net debt-to-equity ratio had improved from 0.45x a year ago to 0.34x.

What’s next for CapitaLand

Over the past few years, CapitaLand has been banking its long term growth prospects primarily on Singapore and China as the company’s positive about the Chinese property market and Singapore’s resilient economy.

Thus, the company’s been actively streamlining its organizational structure to focus on the two markets – Singapore and China – that accounts for 83% and 88% of its asset base and total earnings respectively.

An excerpt taken from the company’s latest financial statements for the fourth quarter of 2013 also shows its future direction and adds on to the point: “Following our re-organization in early 2013 and the strategic review which resulted in the sale of a partial stake in Australand, the Group is on track to deliver stable and sustainable growth. Singapore and China remain its core markets. The Group will focus on the six clusters centered around Singapore; Beijing; Shanghai; Chengdu-Chongqing; Guangzhou-Shenzhen and Wuhan. CapitaLand will harness its capabilities across the four core businesses, and focus on integrated and mixed-use developments to increase its competitive advantage.”

In a nutshell, much of CapitaLand’s prospects will ride 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

At CapitaLand’s current price of S$2.85, its shares are valued at an estimated 0.77 times book value and 14 times trailing earnings. The company’s board is proposing an ordinary dividend of S$0.08 per share for 2013, an increase of 14% from the dividend of S$0.07 per share paid in 2012. This will give CapitaLand’s shares a dividend yield of 2.8% at its current price.

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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 James Yeo doesn’t own shares in any companies mentioned.