Investors have pushed up the share price of Singapore-listed property group CapitaLand over the past month in anticipation that the spin-off of its wholly owned pan-Asian shopping mall business will release hidden value for the group, and yesterday CapitaLand followed suit by announcing that the initial public offering of the unit will be priced at a premium to its own valuation.
In an announcement to the Singapore Exchange, CapitaLand said it will offer approximately 1.17 billion secondary shares in the unit, re-named CapitaMalls Asia, to investors at a price between S$1.98 and S$2.39 apiece. This will result in a total deal size between S$2.3 billion and $2.78 billion ($1.6 billion to $2 billion), making it the largest Singapore IPO since Singapore Telecom went public in October 1993.
The price range also translates into a price-to-book multiple of 1.45 to 1.75 for CapitaMalls Asia, which compared with CapitaLand's own valuation of 1.45 times book. CapitaLand has also had a strong run since the spin-off was first announced on October 5, gaining 15.3% to yesterday's close of S$4.23 and significantly outperforming the 2.4% rise in the benchmark Straits Times Index in the same period. Those gains have pushed up CapitaLand's P/B valuation from 1.2-1.3 times a month ago.
Some of that optimism on the part of investors may have to do with the fact that CapitaLand has said that it "may consider" declaring a special dividend to its shareholders to share part of the capital gain that it may realise from the spin-off. Yesterday's announcement didn't firm up on that promise, although it was still left out there as bait to other potential investors.
However, in a research note issued shortly after the initial announcement, analysts at Macquarie noted that the spin-off should be positive for CapitaLand as a listing "provides much more clarity on the valuation of the overall retail business, which...makes up 22% of CapitaLand's business".
Meanwhile, analysts at Citi have estimated that a listing of CapitaMalls Asia at a valuation of 1.5-2.0 times book would add between S$0.63 and S$1.25 to its base case estimate for CapitaLand's revalued net asset value (including the latest appreciations or depreciations) of S$3.52. In the short term, CapitaLand should trade at RNAV, as enhanced by the spin-off, although after the listing they believe CapitaLand could trade at a discount to its sum-of-parts valuation as it is "increasingly becoming a holding company with a list of listed subsidiaries and associates".
"CapitaLand would have to demonstrate its ability to generate higher returns for a further re-rating," they said, adding that in light of the gains since the initial announcement, CapitaLand is, in their view, already pricing in the potential NAV enhancement from the listing.
The CapitaMalls Asia business is viewed as a growth driver, which is tapping into the economic growth, urbanisation, expanding middle class, as well as the growing affluence and spending power in Asia. And CapitaLand is by no means letting go of that growth potential, even if it is now sharing it with other investors as well. Yesterday, it said that it is retaining 70% of the business for now.
About a quarter of the spin-off is also going to a small group of anchor investors, who were chosen by CapitaLand and include mostly existing shareholders of CapitaLand.
That support may also help to overcome any apprehension investors have about the turmoil experienced by global equity markets over the past week, although one source noted that the positive growth data out of China in recent days do in fact confirm the potential for increased consumer spending. And that should be positive for CapitaMalls Asia, which has a large business in China. The Shanghai Composite Index rallied 2.7% yesterday and Hong Kong too staged an impressive recovery from the day's lows to finish just 0.6% down on the day.
The spin-off provides an opportunity to buy into the retail consumption story across Asia, however - a sector which, until now, has had very few pure plays to choose from. One banker noted that retailers have fashion risk to deal with and super markets are at the mercy of thin margins, while shopping malls are more about having good tenants and about managing the mix of them as well as the surroundings to create a positive shopping experience.
While investors can already get exposure to that through CapitaMall Trust or CapitaRetail China Trust, CMA gives them a chance to participate in the growth story higher up the value chain where margins are likely to be wider.
At the time of listing, CapitaMalls Asia will have a portfolio of 86 retail properties, across 48 cities in five Asian countries, with a total property value of about S$20.3 billion ($14.4 billion). However, this includes properties that aren't wholly owned by CMA, such as those that are part of CapitaLand's two retail-focused Reits -- CapitaMall Trust and CapitaRetail China Trust -- which CMA will have an ownership stake in. Of the 86 properties in the portfolio, 59 are already completed shopping malls in Singapore, China, Malaysia, Japan and India, while the other 27 are at various stages of development. Following a recent restructuring, CapitaMalls Asia has holds a 15% stake in the Raffles City China Fund, which has interests in four Raffles City-branded integrated developments in China. It has also taken over the retail real estate fund and Reit (real estate investment trust) management business currently under CapitaLand. The idea has been to create a vehicle with an integrated business that is active throughout the retail real estate value chain - it will design and develop, as well as own and manage.
The fact that the new vehicle will be highly involved in design and development means that it will be different from CapitaLand's other Singapore-listed units, which are all Reits. Contrary to them, CapitaMalls Asia is expected to pay relatively low dividends - developers tend to distribute no more than 25%-30% of their earnings. The company didn't go into details in yesterday's announcement, but said "the majority of [the] profits over the next few years is expected to be reinvested in our business." However, it also noted that it "believes in the importance of paying a regular and sustainable dividend over time."
Some 88% of the deal will be offered to institutional investors, while 12% has been set aside for Singapore retail investors in a separate offering which will be conducted after the final price has been determined.
The price-to-book valuation implied by the price range positions CapitaMalls Asia at a slight discount to Hong Kong-listed Hang Lung Properties, which is currently trading at about 1.8 times book. Hang Lung is viewed as the nearest comparable since it has quite an extensive portfolio of shopping malls and department stores in China. However, it also has a property development business in Hong Kong, which is expected to generate comparatively lower growth rates and is therefore viewed as a bit of a drag on the overall valuation. Or seen the other way around - the China business is lifting the overall valuation.
Analysts at the banks involved in the syndicate have attached a fair value of about 1.7-2.3 times book to CapitaMalls Asia, which suggest an IPO discount of at least 15% at the bottom of the range.
The institutional order books will be open until November 16 with the final pricing expected the following day. The listing is scheduled for November 25.
As reported earlier, J.P. Morgan and DBS Bank are the joint issue managers for the listing, while Credit Suisse and Deutsche Bank have been added to the line-up as joint bookrunners.