The Motley Fool

CapitaLand Limited’s Latest Earnings: Headline Numbers Down, but Future Looks Bright

CapitaLand Limited (SGX: C31) released its results for the second quarter of 2019. Revenue and profit after tax and minority interest were down 19.3% and 4.2%, respectively. On the surface, it looked disappointing, but there are good reasons to believe the future will be better. Here’s why.

Ascendas Singbridge acquisition will improve cost efficiencies

CapitaLand completed its much-anticipated acquisition of Ascendas Singbridge on 28 June 2019. The combined entity now has a much larger asset base and cements the group’s position as one of the largest real estate groups in Asia.

Group CEO of CapitaLand Group Lee Chee Koon said, “The enlarged and more diversified combined entity provides opportunities for enhanced growth, value creation and the unlocking of value.”

The acquisition of Ascendas Singbridge increases CapitaLand Limited’s real estate assets under management by 25% to S$129.1 billion and adds an additional asset class of business park, logistics, and industrial real estate to its portfolio.

Business parks, in particular, are expected to benefit from changing economic trends such as the growth in e-commerce and knowledge economies.

Scaling up its management business

A real estate company’s operations can be divided into development properties, investment properties, and real estate management. CapitaLand has been keen to scale up its management business as this is an asset-light, high-returns business. 

The purchase of Ascendas Singbridge includes the management of three real estate investment trusts, Ascendas India Trust, Ascendas Real Estate Investment Trust, and Ascendas Hospitality Trust. 

In addition to managing these REITs, CapitaLand also signed management contracts and franchise agreements for 23 new properties earlier this year.

Investors should be pleased to note that as CapitaLand scales its management business, the group will increase its reliable recurring income that will result in a smoother quarterly profit.

Proven track record of recycling assets

CapitaLand has a proven track record of recycling assets opportunistically. So far this year, the real estate giant has divested S$3.4 billion worth of assets, meeting its long-term annual target of S$3 billion.

There will also be future revenue recognition as the group sold 203 units of One Pearl Bank, which was launched only in July 2019.

Its other investment projects have also done very well, with the group selling 70% of the 505-unit Park Regent in Malaysia and 3,025 units with a sales value of RMB6.4 billion in China in the first six months of 2019. 

7,300 units in China are expected to be handed over from the third quarter onwards, with 50% of the sales value expected to be recognised over the next six months.

The Foolish bottom line

Despite lower net profits, CapitaLand is in a fantastic position for better earnings in the future. Besides growing recurring management income, the group also now boast increased scale and has exposure to the fast-growing business park space. 

From what I have seen, CapitaLand will likely continue to provide shareholders with decent returns well into the future.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of CapitaLand Limited. Motley Fool Singapore contributor Jeremy Chia does not own shares in any of the companies mentioned.