CL has launched S$3bn of rights issues today - $1.84bn for CL (1-for-2; $1.30 price; -45% to close) and $1.23bn (9-for-10; $0.82 price; -43% to close) for their CMT REIT. This has been expected by the market for the last month, and therefore should be largely priced in. Concurrently the full year results were released, and at an immaterial -4% below our numbers were uneventful.

Management appear to subscribe to the school of thought that investors should be relatively indifferent to the pricing and size of a renounceable, pro-rata entitlement rights issue, and are therefore comfortable to dilute NAV/EPS in order to grow the already sizeable war-chest of cash ($4.2bn pre; $6bn+ post). The price of this is the -22% NTA dilution and -25% EPS dilution.

CL is a ROE/ROA focused asset developer and trader. Market conditions do not favour this business in the short term, therefore they are overweight cash. We expect management confidence that asset markets have reached a trough (as signalled by deploying their cash balances) to be the main catalyst for this stock. We do not expect this in the short term, but believe it is likely H2’09.

We have reduced our 12mth PT to $2.80 (ex-rights), in line with the post money stated NTA. At the TERP this implies a -28% P/BV and -55% P/RNAV.

CapitaLand (CL) today brought forward their full year results by one day, and launched a S$1.84bn, 1-for-2 rights issue. CL also concurrently launched a $1.23bn, 9-for-10 rights issue for their CMT REIT in which CL will take its 29.7% ($365m) pro-rata stake, and potentially up to 60% ($738m) of the deal via an underwriting agreement.

We expect a similar rights issue ($1.1bn+) for their CCT REIT at some point in 2009 (our key Sell in the S-REIT sector). See our Singapore Real Estate strategy note from 16 Jan’09 for more colour on expected issuance in the sector. There has been a lot of speculation surrounding the potential for such an issue in the last month, with this in part causing CL’s price to fall -34% since the recent high of $3.59 on 5 Jan’09. We would therefore contend that, at least to a large extent, this deal is priced in ahead of today’s announcement.

The deal itself though, is larger and more heavily discounted though than many investors seem to have anticipated. As a result there may be some near term pressure, but we would encourage investors to subscribe as we see strong value in this blue chip name ($1.30 = -70% P/RNAV and -54% P/BV) and likely catalysts on a 6-12mth view (trough asset markets; inventory re-stocking commencing). Offsetting this we have seen a short squeeze in similar deals recently, where no placement component was offered. This could result in solid price performance post announcement, especially given the -34% decline into the announcement. CL remains our key developer pick, and we reiterate our Buy rating.

We have adjusted our EPS forecasts to reflect the increased equity base. This results in an average EPS decline of -25% pa. All other things being equal, our RNAV declines to $4.50, from $6.10 (-26%). Our $3.70 price target has been based off stated NAV (now $3.78; +6.8% yoy). We assume the stated NTA declines to $2.80 post equity, therefore our revised price target is set at parity to this. The price currently has $0.35 of embedded rights (ex 19 Feb, traded 26 Feb to 6 March), with the $2.80 PT on an ex-rights basis. We struggle to see CL trading above NTA until asset markets start to recover.

We understand CL management to be of the mindset that if everyone participates in a pro-rata entitlement rights issue, then no one is disadvantaged as a shareholder. As a result there was no overnight placement component in these deals (are there active shorts expecting a placement?), with the full issue structured as a renounceable, pro-rata entitlement rights issue. This partly explains why they remain comfortable doing this deal even at the current depressed share price.

With this apparent mindset, it also helps understand why the company is not sensitive about dilution issues from raising equity that it says it wants but doesn’t need, at a materially deeper discount than the market appears to have been anticipating.

The strategy and intent here is to make a strong company stronger, and ensure excess capital to scale up the business when others are struggling. This is a desirable situation, as long as one can accept the headline per share EPS/NAV dilution (something the real estate sector has a chequered and varied past in accepting or punishing).

CL currently has 0.47x net debt/equity (0.28x post), with $4.2bn of cash pre the equity raising. The current debt has an average debt maturity of 4.4 years. There appears to be S$5.9bn of liquidity available at the corporate treasury level, including S$2.96bn of cash and S$2.95bn of un-drawn debt facilities.

As a result, if combined with the S$3.7bn capacity in the private equity funds and the $1.8bn being raised now, this implies the group has somewhere approaching S$11bn of acquisition capacity across the business without securing new debt facilities. For a group with $21bn of assets, and $26bn of off balance sheet AUM this is material.

The results themselves were in line with our expectations, with headline PATMI -4% below our estimates at $1,260.1m (UBS $1,317m), and PATMI ex non cash revaluations also -4% below at $1,040m (UBS $1,083m). After a record 2007, the profit decline in 2008 was expected.