INVESTORS scurry for cover in the strongest fortresses they can find when a storm breaks - such as the ferocious one currently raging in global financial markets.
But even the strongest citadel will show signs of wear and tear amid the panic that has been unleashed in recent weeks - just look at CapitaLand.
With a market value of $16 billion, the real estate giant must surely qualify as an ideal ‘fortress’ for property bulls to take cover in until calm is restored on global bourses. And while the counter managed to stay relatively unscathed as the shares of other developers crumbled under the strain of the United States sub-prime mess and a vicious selldown, its strong walls showed signs of stress last week.
In the big frenzy that started on Jan 21, a Monday, when regional bourses were hit by widespread panic-selling, CapitaLand plunged to $5.10 at one point - its lowest levels in 19 months.
However, the relief rally sparked by the US Federal Reserve’s emergency interest rate cut of 0.75 percentage point last week enabled it to recover to a high of $6.55 on Tuesday.
But investors are now wondering if that is the best CapitaLand can manage in the near term. A further Fed cut of 0.5 percentage point on Wednesday failed to give CapitaLand a lift even though its bottom line should get a boost from the falling costs of funds.
Yesterday, the stock fell to a low of $5.58 before closing 10 cents lower at $5.80, as investors were spooked by news that it was raising $1.3 billion via a 10-year convertible bond issue.
This begs a question. Surely, in the current climate when the availability of credit is drying up globally, raising such a big sum should be a feather in CapitaLand’s cap.
The conversion price of $8.614 - which works out to a hefty 48.5 per cent premium over yesterday’s close - is not the same as giving away the family silver.
But some market observers believe the selldown could be due to fund managers switching out of CapitaLand into the bonds that pay a coupon rate of 3.125 per cent per annum.
Said a dealer: ‘In times like these, preservation of capital is king. If you believe that CapitaLand has more downside, you can cap your loss by selling the shares and buying the bonds. And since it is a convertible bond, you get to enjoy any upside if it subsequently rebounds above $8.60.’
So using the fortress analogy, fund managers are simply taking shelter in the strongest part of CapitaLand’s edifice, as storm clouds continue to gather and the global financial system encounters further stress from the sub-prime fallout.
Even the usually ebullient property analysts are not getting excited over developers’ prospects. Morgan Stanley analyst Melissa Bon noted in a report on Jan 25 that the attractive valuations for property counters may be an illusion.
Even though the sector is now trading at a 28 per cent discount to its net asset value, compared with a 15 per cent premium a year ago, she ’sees potential downside risks if there are further delays to residential launches’.
CLSA is also cautious, saying in a recent report that ‘2008 will see a year of more sustainable price growth though the pace of increase is likely to slow’.
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