Capitaland - Time to buy now?

Almost a month ago, CapitaLand made a major announcement that it will be restructuring the company by separating the company into 2 distinct units – a real estate development unit and a fund management + lodging unit. The real estate development unit shall be privatized and what is left will be the fund management + lodging unit, which will remain listed on SGX.

In return, shareholders of CapitaLand will receive S$0.951 cash per share + 0.155 unit of Capitaland Integrated Commercial Trust for each CapitaLand share that they own.

According to CapitaLand, the implied consideration to shareholders is S$4.102 per share, comprising cash consideration – S$0.951 per share + 1 share of fund management company for each CapitaLand share held (valued at S$2.823/share based on NAV) + 0.155 unit of of CapitaLand Integrated Commercial Trust (“CICT”) (valued at S$2.122/share based on 1M VWAP). Hence the implied premium was 24% above the pre-announcement closing price of S$3.31 per share.

Initial reaction was positive, with CapitaLand's share price rising to as high as S$4.01 per share the day after the announcement.

However, a month later, the price has fallen by 12.5% from the peak to S$3.51 per share. This is just 6% above the pre-announcement price.

Is this a buying opportunity for CapitaLand?

Perhaps, let us dig deeper into the mechanics of this restructuring exercise.

In the entire sum of implied consideration to shareholders, only one component comes with certainty, which is the cash component of S$0.951 per share. As for the 0.155 unit of CICT consideration, this is subject to market price movements of CICT and shareholders may not realize the value of S$2.122 per share assumed by CapitaLand if CICT unit price drops. And lastly, for the 1 share of the fund management unit, it is assumed that this company will be valued at its book value, but the ultimate value to be realized by shareholders is also subject to how market eventually values this company.

Let's do some scenario analysis.

Based on today's market price, CICT is priced at S$1.99 per unit, which is 6% lower than the consideration assumption.

Then for the valuation of the new fund management unit, we take reference from the valuation of CapitaLand before the announcement, which was at 0.76x price-NAV ratio.

So, assuming CICT units at today's market price and the valuation of new fund management business at 0.76x price-NAV, technically, CapitaLand should be valued at S$3.43 per share. This would be the level that provides a good safety margin and better risk reward for investors.