Capitaland - Sprouting more branches with CapitaMalls Malaysia Trust

CapitaMalls Asia, which is 65.5% owned by Capitaland, announced on Friday that it has received approval from the Securities Commission of Malaysia to list a Trust (CapitaMalls Malaysia Trust) on Bursa Malaysia. The trust will consist of 1,350,000,000 units upon IPO, whereby 786,522,000 units will be offered for IPO, leaving CapitaMalls Asia with a 41.74% stake. This could fall to as low as 33% if an over-allotment option is exercised.

The trust will hold CapitaMalls Asia’s Malaysia shopping malls, and three Malaysian shopping mall assets will be injected into the trust upon IPO. These are the Gurney Plaza in Penang, an interest in Sungei Wang Plaza in Kuala Lumpur, and The Mines in Selangor, resulting in a total net lettable area of approximately 1.88 million sq ft for the portfolio. AmTrustee Berhad has been appointed as the trustee for CapitaMalls Malaysia Trust, and has valued the portfolio at approximately RM2,130.0 million (this is substantially different from the RM1,482.48 based on the indicative price of RM1.10 which cornerstone investors EPF Malaysia and Great Eastern Life Assurance have agreed upon, suggesting that some debt may also be injected into the initial portfolio).

This latest proposed listing augments our investment thesis for Capitaland - the company continues its excellent job of asset recycling, which frees up capital much more quickly for further growth. Along the years, Capitaland has created enormous amounts of shareholder value via REIT securitisation of its assets. Still maintaining a stake in each, the company could offload new developments quickly, and utilise the proceeds for further expansion, instead of waiting for years to recoup the development costs. The company also earns recurring income from the management of the trust assets, most of which are being paid for by new shareholders brought in under the REIT structure.

The listing of CapitaMalls Asia allowed Capitaland to monetise part of an important subsidiary for over $2.8 billion, but still retain its majority interest in the subsidiary (65.5%), and this proposed listing of CapitaMalls Malaysia Trust is further indication that the "Macquarie-style" model of asset recycling is very much alive under the Capitaland group.  

Sold off CMA

Sold off the remaining lot of CMA at $2.24

Portfolio down 2.2% in January; commodity price impact on Noble's earnings

Equities generally had a rather poor January, leading to a 2.2% decline in the portfolio for the month. Assuming the portfolio started 2010 at $1.000, each unit ended the month at $0.979. Still, this was significantly better than the 6% decline in the Straits Times Index, or the MSCI World's 4.3% decline.

BERKSHIRE HATH-B	+16.5%
WELLS FARGO	+5.5%
SPH	+3.5%
CAMBRIDGE	+2.2%
KEPPELCORP	+1.7%

CAPITAMALL	-6.1%
TAT HONG	-6.2%
GUOCOLEISURE	-7.9%
CAPITAMALLS ASIA	-8.7%
NOBLE GRP	-11.4%

Berkshire Hathaway was the outstanding performer, jumping 16.5% as investors piled into the stock in anticipation of its addition into the S&P 500 (replacing Burlington Northern). Wells Fargo turned in a respectable performance (+5.5%) while SPH also gained on better-than-expected profits.

Noble Group was the worst performer, falling 11.4% as commodity prices wavered. Noble's dependence on commodity prices is often overestimated by most investors, who choose to lump the company together with other commodity producers who suffer a large hit to earnings when commodity prices decline. Noble's business model involves hedging inventory as it is passed along the supply chain, which involves little exposure to commodity prices. 

Noble's earnings hardly fluttered as commodity prices went from boom to bust in the 2008-2009 crisis, indicating a relatively low dependence on an appreciation in commodity prices. High prices require Noble to post more collateral to hedge, a drain on cash resources, which means that Noble would prefer lower, or at least less volatile commodity prices.

Despite the sharp declines, the stock is not terribly cheap as the market attempts to factor in strong future earnings growth (Richard Elman has been quoted as targeting US$1 billion in profit sometime over the next few years). The company has excellent management and is extremely focused on shareholder value, which has resulted in the stock being the best performer on the STI in 2009. As one of the few companies in the STI with truly strong earnings growth potential, we will want to accumulate more Noble shares, but will wait patiently for a better entry level to add to our existing position.

On Capitaland's selldown, and keeping some powder dry

The Singapore market continued its descent today, a sixth straight day of decline. The STI closed 27 January 2010 at 2706.26, 6.6% below the closing level of 2009. The purchase of Capitaland on 25 Jan now looks like a "silly" buy, the stock closing today at $3.74, some 7.4% lower than our recent buy price.

Capitaland hit a recent peak of $4.38 on 20 Jan, after announcing the acquisition of Orient Overseas' Chinese property assets. Sell side analysts were in a rush to upgrade the stock, citing the transaction as "accretive to RNAV". Of course, the People's Bank of China's hawkish approach to lending subsequently led to a 360-degree reversal in sentiment on Chinese property stocks, leading to a sell down in Capitaland and other property companies with exposure to Chinese real estate.

As mentioned briefly in our prior post, we like Capitaland for its strong management and good track record of execution. Its ability to spin-off assets to the wide range of trusts and privately-held property funds under management is also a major selling point. The "premature" tightening activity by the Chinese central bank should be seen as a positive move to allow for more sustained growth in the years to come, rather than to have the economy grow too fast in the short term. After all, we are looking to hold our position in Capitaland for many years to come, to benefit from the Chinese growth story. So in a twisted sort of way, early measures by the Chinese central bank are generally positive in our view, but the resulting correction in markets presents a short-term opportunity.

Today we sold one non-core holding, Micro-Mechanics (7,000 shares, $0.40) and two lots of CapitaMallsAsia ($2.28). While Micro-Mechanics possesses a uniquely shareholder-friendly management, we think that it would be good to keep some powder dry in the event of a larger-than-expected market correction. Exposure to CapitaMallsAsia was obtained through the recent IPO at $2.12, and while we regretfully failed to take profits at the recent peak of $2.70 (!), the stretched valuations of the stock make it a low-conviction stock in the portfolio. The valuation of the underlying Chinese property funds are difficult to value, and even with recent revaluation done, the stock trades at about 1.3X book. We prefer exposure to the parent Capitaland, and have thus sold two lots to build portfolio cash reseves.

Initial Portfolio Holdings

On 31 December 2009, we held stocks worth $104,789.07, along with cash of $4,879.03.