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Felicia Tan Published on Fri, Oct 01, 2021

Analysts from Goldman Sachs and HSBC Global Research have initiated “buy” on CapitaLand Investment (CLI) with target price estimates of $3.64 and $3.90 respectively.

According to Goldman Sachs analysts Xuan Tan, Gurpreet Singh Sahi and Hanyu Zou, their target price of $3.64 implies an FY2022 of 1.19 times price-to-net asset value (P/NAV).

The valuation, say the analysts, is “justified” by CLI’s return on equity (ROE) improving to 7% over FY2022 to FY2023 versus 4% on average over the past three years.

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It also remains “significantly below” the REIM peer average of 2 times.

In their report dated Sept 21, the Goldman Sachs team estimates that CLI’s fees from fund, property and lodging management will make up around 20% of its EBITDA over FY2021 to FY2021.

“Real estate earnings from on-balance sheet assets and its stakes in unlisted/listed funds will contribute the balance,” they add.

On the restructuring, the team sees improved earnings visibility and margins as some of the key benefits.

“Earnings visibility is clearer without the more volatile development segment (30-50% of FY2018-2020 revenue). Other earnings, from management fees and real estate investment, are broadly recurring in nature. Coupled with operational improvements and recovery from Covid-19, we expect higher core PATMI margins of [around] 55% in FY2022-2023E (vs 12-20% five-year average),” write the analysts at Goldman Sachs.

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“Our peer comparison suggests management’s strategy of pivoting towards the new economy, sharpening focus as a REIM and improving ROE can drive a higher P/NAV multiple. However, there remains room for improvement in terms of increasing its fee-to-AUM ratio, becoming more asset light with lower gearing, and further increasing its new economy exposure,” they add.

On this, the analysts see catalysts in funds under management (FUM) growth, effective capital redeployment and operational improvement.

Risks to the counter include the acquisition of fund platforms at elevated multiples, slower-than-expected growth in lodging and FUM, as well as weaker margin improvements.

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HSBC Global Research analysts Joy Wang and Utkarsh Rastogi say their fair value estimate of $3.90 for FY2022 consists of their valuation of CLI’s tangible assets, its fund management business valued at 14 times FY2022 EV/EBITDA, as well as its lodging business.

“Our target price implies 24x pre-Covid-19 EV/EBITDA. [It also] implies a FY2022 EV/adjusted EBITDA of 20 times and P/core E of 25 times, compared with the sector averages of 32 times and 29 times, respectively,” write Wang and Rastogi in a Sept 21 report.

To them, CLI’s growth in its fund management business is the “key catalyst” with “FUM growth trajectory set to drive rerating”.

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“Under our bull-case scenario, in which FUM reach $110 billion by 2023, we see a three-year earnings compound annual growth rate (CAGR) of 37% and our fair value estimate would increase to $4.40 per share by FY2023,” they add.

To the team, CLI’s management’s ability to grow its FUM and increase its fund management contribution is “crucial” to CLI’s valuation.

“Should the fund management business remain a small proportion of the overall business, CLI’s valuation could revert to that for a traditional landlord model at a discount to revalued net asset value (RNAV),” which the team deems as a downside risk.

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“In addition, as REITs contribute a substantial part of CLI’s business, uncertainties over the interest rate outlook could have an indirect impact.”

As at 12.55pm, shares in CLI are trading 7 cents lower or 2.06% down at $3.33.

Photo: CapitaLand