CapitaLand’s 1Q09 net profit of S$42.8mn undershot our expectations, falling by 82.7% y-y from S$247.5mn in 1Q08. Excluding divestment gains (CapitaLand booked S$137mn in divestment gains in 1Q08), net profit fell by 61.5% y-y. Broad weakness was evident across mostoperating divisions, with residential in Singapore hit by lower pre-sales and smaller staged completion booking of development profits, and Australand and Ascott on our analysis reporting weaker operating numbers. As a result, we lower our forecast contributions from the group’s major subsidiaries. We cut FY09F and FY10F EBIT + associates by 10.6% and 10.5% for Australand, and by 24.3% and7.1% for Ascott, on expectations of lower revenue per available room(REVPar). While our core property price assumptions are unchanged, the adjustments to profit booking pare our residential contribution forecast for FY09F by 2.6%. The net impact of the above adjustments is a cut in earnings of 11.2% for FY09F and 7.9% for FY10F.

The rights issue in 1Q09 saw gross debt shrink by S$2.3bn y-y, cutting the group’s net debt/equity to 0.32x (from 0.59x at end-1Q08). The group has a cash balance of S$5.5bn. Its net interest expense in 1Q09F was S$85.6mn (in line with our full-year forecast). Note: CapitaLand did not book any revaluation deficits in 1Q09 as “it is the practice of the group to revalue its investment properties half yearly”, with the group warning of “downside risks to capital values”.

Following the adjustment to our earnings estimates, our intrinsic SOTP NAV falls marginally to S$2.91/share (from S$2.94/share). We see inherent value in CapitaLand in the medium term, as evident in our intrinsic fair value. That said, and not withstanding the market’s recent appetite for risk, we maintain our trough valuation methodology to derive our intrinsic SOTP NAV, as we see continued downside risks to earnings given our expectations of further weakness in the Singapore residential market and for subsidiaries Australand and Ascott.

Given these risks we have applied discounts to our intrinsic fair value based on historical trading patterns to derive our FY09F price target. While we see the outlook for asset prices as potentially being worse than during the 2001-03 Sars-induced recession, CapitaLand on comparable credit matrices appears to be in better shape. Our FY09F price target is set at a 52.5% discount to NAV (ex-associates), which equates to S$1.71/share (previously S$1.72/share).