CapitaLand Bouncing Back On Renewed Asset Recycling

I’ve lamented in the past that no matter what CapitaLand (OTCPK:CLLDY) (CATL.SI) does, the shares seem stuck between S$3 and S$4. When I last wrote about the shares, they were on their way down to retest that S$3 level and have since rebounded on good second quarter earnings, the naming of a new CEO, and ongoing steps to recycle capital into new investments, including a meaningful move into the U.S. market.

CapitaLand remains a challenging stock. The liquidity for the ADRs isn’t great (the Singapore-listed shares are far more liquid), and this is a tough stock for many investors to evaluate and model. On the other hand, CapitaLand has proven itself to be a quality developer and manager of properties in Asia with the ability to earn above its cost of capital. That is not presently reflected in the share price, and I believe there is still worthwhile upside from these levels.

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CapitaLand Bouncing Back On Renewed Asset Recycling

Seeking Alpha: CapitaLand Still Not Getting Much Benefit Of The Doubt

The self-improvement story at Singapore's CapitaLand (OTCPK:CLLDY) has run up against investor concerns about the property markets in Singapore and China, and so far the concerns are winning. CapitaLand has gone nowhere fast since my last update on the company, as the local shares have climbed about 5% and the ADRs are down about 3%. That's pretty close to the performance of fellow Singapore property developer City Developments (OTCPK:CDEVY) and Chinese developers like Sung Hung Kai Properties and Hang Lung Properties; there have been outperformers in the comp group, but overall I think the performance of CapitaLand is more of a sector phenomenon than a verdict against the company.

I continue to believe that CapitaLand is undervalued on its potential, but it is incumbent upon management to prove that it can deliver on that potential. The company's suburban malls in Singapore and China are doing well (and there's growth/expansion potential into markets like Indonesia and Malaysia) and the company's expertise in integrated project development is leverageable across a large potential base of projects. If CapitaLand can hit the middle of its ROE target in five years, a fair value of $6/ADR still makes sense and an NAV approach supports a similar fair value.

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CapitaLand Still Not Getting Much Benefit Of The Doubt

Seeking Alpha: CapitaLand Remains Undervalued Amidst Challenging Property Markets

I previously thought that CapitaLand (OTCPK:CLLDY) looked like an undervalued property developer with balanced exposure to Singapore and China and strong portfolio diversification. The markets appear to have agreed, with CapitaLand's shares rising about 15% over the past six months - outperforming comps and peers like City Developments (OTCPK:CDEVY), Keppel Land (OTCPK:KPPLY), Global Logistics Properties (OTCPK:GBTZY), and Cheung Kong (OTCPK:CHEUY) (which I also liked and is up more than 10% over the past six months).

I believe that CapitaLand's decision to reacquire all of CapitaMalls Asia played a meaningful role in this outperformance, but I don't think that is the only trick up management's sleeve. Although the property markets in Singapore and China are in rougher shape now, I don't believe the company has much value at risk and there are attractive opportunities on the way to re-price below-market leases in its Chinese mall business. The key question is still whether or not management can lift ROEs back into the high single-digits or low double-digits, but I still believe that they can (and will) and that these shares have value to around $6.50/ADR.

I should also note here that CapitaLand is not particularly liquid as ADRs go. Investors should be careful when buying (limit orders are a good idea) or try to buy the much more liquid Singapore-listed shares, as most large brokers now make international trading available to retail investors at affordable commissions.

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CapitaLand Remains Undervalued Amidst Challenging Property Markets