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Focus 74

CapitaLand reported 4Q08 PATMI of S$78m, down 88% yoy bringing the full year profit to S$1.26b, down 54% yoy. Excluding fair value losses/gains, the fourth quarter and full year PATMI would have been S$144.2m and S$1.04b. The bulk of the S$66.2m of revaluation losses in 4Q08 came mainly from Japan, Australia and UK. Overseas operations accounted for 60% of EBIT and China operations dominated the bulk 40% of earnings by strategic business units mainly due to the realisation of divestment gains from Capital Tower Beijing and Raffles City integrated developments.

FY08 PATMI excluding revaluation gains is in line with our expectations, representing 103% of our full-year forecast of S$1,010.5m (95% of consensus' S$1,088.7m). CapitaLand also announced a 1-for-2 rights issue to raise S$1.84b. The rights issue price of S$1.30 is at a 45% discount to the closing price of S$2.36. Capitaland proposed a total dividend of 7 cents per share taking under consideration the enlarged share base due to the rights issue.

Stock Impact

· Rights Issue overhang out of the way. Previously, the market has already factored in the potential dilutive effects of the rights issue, with CapitaLand's share price falling 20% from S$3.02 to S$2.36 in the period after the rumour of a rights issue surfaced. With the formal announcement of the rights issue yesterday, the share price will no longer be bogged down by any market rumours.

· Strong support from major shareholder. In support of the rights issue, Temasek Holdings, a major shareholder of CapitaLand has entered into sub-writing agreement with the Joint Lead Managers and Joint Underwriters (DBS, J. P. Morgan and Merrill Lynch) and has undertaken to subscribe for its pro rata entitlement of rights shares. This represents a vote of confidence from Temasek.

· Rights issue will enhance financial flexibility. CapitaLand is well capitalised with cash reserves of S$4.2b, healthy gearing of 0.47x, interest cover of 5.0x and average debt maturity of 4.4 years. Post-rights issue, the proforma net debt-to-equity ratio of the Group is expected to improve to 0.28 with proforma cash of S$6.02b, thereby further enhancing its financial capacity to take advantage of arising opportunities. In comparison with regional peers, CapitaLand's financial position stands out.

Earnings Revision

We maintain our earnings estimates.

Valuation/Recommendation

The rights issue further enhances CapitaLand's financial flexibility to weather the weak property market conditions and take advantage of opportunities arising. We lower our FY09 RNAV by 24% to S$3.49 factoring in the dilution from the rights issue. Maintain BUY with the rights-adjusted target price of S$2.80 (previous: S$3.70) pegged at a 20% discount to FY09 RNAV of S$3.49. The rights-adjusted target price offers a 40% upside from the theoretical ex-rights price of S$2.01.