CapitaLand's latest spin-off taps into Asia's consumer demand

Singapore-listed property group CapitaLand has announced that it will list its wholly owned pan-Asian shopping mall business on the Singapore Exchange and plans to sell part of the business to investors through an initial public offering, giving them a chance to buy into the Asia retail growth story.

CapitaLand's shareholders will get to vote on the plan at an extraordinary shareholders' meeting that is expected to be held in about three weeks and, if approved, the management has given itself 12 months to complete a share sale. However, depending on market conditions, it would be reasonable to expect a deal sooner rather than later. One indication that this is likely is that CapitaLand has already mandated J.P. Morgan and DBS as joint issue managers for the proposed offering.

J.P. Morgan, which over the years has become something of a house investment bank for the CapitaLand group, is also acting as the sole financial adviser to CapitaLand with regard to the listing of the shopping mall business.

The business, which is currently known as CapitaLand Retail but will be renamed CapitaMalls Asia to better reflect its wider geographic focus, will be restructured before listing. Among other things, it will take over the retail real estate fund and Reit (real estate investment trust) management business currently under CapitaLand and take a 15% stake in the Raffles City China Fund, which has interests in four Raffles City-branded integrated developments in China. The idea is 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.

At the time of listing, CapitaMalls Asia, or CMA, 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.

The fact that CMA will be highly involved in design and development means that CMA will be different from CapitaLand's other Singapore-listed units, which are all Reits. As such, their focus is on management of completed assets and the delivery of a steady income stream that is passed on almost entirely to unitholders. By comparison, CMA will likely have a relatively low payout ratio -- developers tend to distribute no more than 25%-30% of their earnings -- as it will plough most of its profits back into the business and will actively try to build and develop its own malls to grow its portfolio.

Consequently, the offering will be marketed to potential investors as a growth play, rather than another yield play. And growth is something there should be quite a lot of in this sector, according to analysts, who cite economic growth, urbanisation and an expanding middle class as key drivers of growing affluence and spending power among Asians.

A source familiar with the sector notes that organised retail, which is basically malls and large shops as opposed to corner shops and street stalls, make up in excess of 80% of the total retail sector in countries like the US, and in Singapore about 60%. But in China it makes up only 20% and in India it is even lower.

"As you see more urbanisation and GDP growth in emerging markets, you would expect them to start utilising mall-formats much more. So you have growth not just in population and their savings and spending habits, but you have growth in how they choose to shop," he says.  

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. However, CMA will also have a lot higher development risk, meaning it is likely to be targeted by a different type of investor than CMT and CRCT, which are passive income-producing entities with low risk and steady cash dividends. Some of CMA's malls may, when they are completed and have reached a state of stable growth, be transferred to either CapitaMall Trust or CapitaRetail China Trust as a way for CMA to recycle capital -- or it can continue to own the malls itself.

By getting a separate listing and valuation for CMA, CapitaLand will also be hoping to unlock additional shareholder value in its own business, while at the same time giving the newly listed entity more financial flexibility through a direct access to the capital markets. CMA will have a relatively low gearing at the time of listing, which will give it lots of room for expansion.

"The proposed listing...is consistent with CapitaLand group's approach of optimising business growth with prudent capital management," CapitaLand's chairman, Richard Hu, said in a written comment.

CMA has already proven that it can grow rapidly, and has expanded from just five malls valued at about S$1.2 billion in 2002 (then under the name of CapitaLand Retail). The company's effective interest in the 86 malls it is invested in today is valued at about S$7.0 billion.

In the six months to June 30, CMA posted a net profit of S$183.9 million ($130 million), which compares with a net loss of S$161.1 million for CapitaLand in the same period.

And CapitaLand is by no means letting go of this growth-driver. In a statement on Monday it said it intends to keep a majority stake in CMA for the foreseeable future. However, it also 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.

Analysts were generally positive on the news and several firms upgraded their recommendations for CapitaLand yesterday - some to "buy" and some to "hold". The company's share price also gained 2.2%, outperforming the 1.1% rise in the Straits Times Index. Singapore has seen no IPOs of size this year, but whether or not this deal will come in time to change that is not clear at this point.

CapitaLand didn't specify how much of CMA it may sell to other investors, although when calculating the potential financial effects on the group, it used an assumption that 30% will be spun off. Based on the current share price, this would suggest that that the proposed offering of CMA shares will account for about 10.3% of CapitaLand's market capitalisation.

In its base case scenario, CapitaLand is assuming the offer price will be on par with CMA's book value, which, based on a consolidated book value of S$5.236 billion at the end of June, would suggest a possible deal size of S$1.57 billion ($1.1 billion). CapitaLand is currently trading at about 1.2 to 1.3 times book.