Capitaland has long been one of Singaporeans’ beloved stocks. It first listed on 21 November 2000 with a turnover of S$2.9b managing S$17b residential development properties, investment properties, serviced residences and hotels. Fast forward 18 years, today it has become a powerhouse in Asia with S$5b turnover (LTM), managing S$88.8b of assets across 32 countries.
With the recent hike in ABSD, Singapore residential developers have undoubtedly been punished in a bid to prevent an oversupply of residential properties being developed in Singapore. Capitaland wasn’t spared either, but the effects of diversification shone brilliantly in the case of Capitaland. Although Capitaland declined ~6%, other developers fared much worse, experiencing 15-20% decline after the announcement was made.
Here we see that Capitaland has over the years worked to build a portfolio to avoid geographical concentration risk from a portfolio that once looked like this:
Had its geographical presence been like this today, it’s share price movement over ABSD would probably look a lot more like what Oxley experienced. Oxley had 100% of revenue solely from residential properties in Singapore up till 2017, before expanding out into UK, leaving 75% of revenue coming from Singapore like the diagram above.
Although ABSD is probably not the cause of the decline that started since the start of the year (interest rate hikes), it pretty much is like a cherry on top of an already bad situation. But it’s the same reason why an opportunity would finally arise for those who are armed and ready to take advantage of an overdone situation.
I felt that the drop in prices has de-risked the investment opportunity significantly and presented investors a window of opportunity to get in on Capitaland at a discount. As the saying goes, a picture speaks a thousand words, and honestly, to investors who aren’t too involved in the property market, it may be hard to understand why analysts would put a 20% discount on RNAV (Who even decides that?). Rather, I looked at it from another approach as simply as I could, which made sense to me. The TP of $3.96 is simply letting P/B trade to its high.
Chart above is the share price and chart below is the P/B ratio. If you haven’t already noticed, both move in lock-step, and it should be no surprise because they both have ‘Price’ as the numerator. Looking at it this simply has its drawbacks. P/B can also increase because the Book Value (‘B’) drop. So this leads to the next question – “What is book value?”.
Book value is also the net asset value of a company, calculated as total assets minus intangible assets (patents, goodwill) and liabilities. Essentially, it’s the Equity of the Balance Sheet that you see. To make sure that P/B wasn’t increasing because ‘B’ was decreasing, I did a quick lookup on the multi-year level Tangible BV.
Upon seeing these set of numbers, I was more than relieved to know that my fears have been allayed. In fact, this means a lot. (Share price and P/B can move in lockstep even when ‘B’ maintains constant.) Appealing to the TA readers as well, let’s take a look back at the two charts. In 10 years, we meaningfully hit 0.7x P/B 3 times in the past, making this the 4th time. In other words, this opportunity comes every 2.5 years. But right now we are beyond just a case study, we are at a point where we still can gain at least 75% of the upside. No doubt, it just declined from its high of $3.85 earlier this year and it looks terrible and may appear ‘scary’. At times like this, terms like ‘dead cat bounce’, ‘retracement’ or even ‘bear flag’ are pretty common – when one only considers the price movement.
Could Capitaland’s share price fall further? For sure. Can it be justified? I can’t be sure. So let’s conduct a simple litmus test by asking if the situation now is as bad as back in 2009, a time of crisis, for it to warrant being priced at such a multiple. Of course, many things have changed from 10 years ago. Who knows, trading at 0.5x P/B could become the norm, but I find that unlikely. Using probability-weighted decision making, I skew towards believing that we may have found ourselves an inflexion point.
Key Risks / Uncertainties
- Devaluation of properties
- China property curb
- Further interest rate hikes
- TDSR / ABSD changes
Currently, Capitaland is priced at $3.26 (0.74x P/B). To watch it trade to the resistance of 0.90x P/B would mean that there remains potentially 21.6% upside to be capitalised upon as this article gets published. A blue-chip stock, a window of opportunity that occurs every 2.5 years, with a decent upside.
The risks mentioned have not been elaborated to encourage due diligence. With that being said, I won’t be watching this boat sail by. I am vested.