High Margin And Steady Growth Via Multiple Platforms
We initiate CLI with a BUY and a SOTP-based target price of S$4.02. We forecast 39% earnings growth over the 2021-23 period driven by FUM growth and a normalisation of investment property earnings after the COVID-19 peak. Compared with its regional and global peers, CLI’s valuations appear inexpensive with 2022 P/NAV and EV/EBITDA at 1.4x and 21.1x respectively. Share price catalysts include cap rate compression and stronger-than-expected fund growth.
• Exciting growth in its fund management platform. CapitaLand Investment (CLI) has S$115b in AUM which makes it one of the largest real estate invesment managers (REIM) in Asia. Of this, S$83b, or 72%, are funds under management (FUM) and the company has plans to grow this to over S$100b by 2023/24. We forecast FUM fee income to grow at a 14% CAGR over 2020-23. In addition, the company has >S$10b in assets that it will look to monetise in the next few years.
• Proxy to reopening. While there are other reopening plays after the COVID-19 peak, we believe CLI is an excellent proxy as it has about 83% of its AUM in traditional real estate segments such as office, lodging and retail. Lodging in particular has seen a gradual recovery in the past 12 months given CLI’s exposure to long-stay assets, and as global travel resumes, should provide CLI with upside. Besides, the company has >S$1b in new logistics and data centre funds which it has successfully raised in the past 18 months.
• High EBITDA margin business. CLI’s fee income-related business contributed about 40% of revenue in 2020, supported by average EBITDA margins of 56% over the 2017-20 period. The company has a strong and stable platform that generates fee income from its investment and asset management of listed REITs and unlisted funds, lodging management and property management across its asset classes.
• Initiate coverage with BUY and target price of S$4.02. We value CLI at S$4.02/share using an SOTP methodology which comprises of: a) its fee-income platform where CLI earns fees from its investment management (IM), property management (PM) and lodging management (LM) platforms; and b) its investment properties which CLI accounts for on on its own balance sheet, as well as its various stakes in its listed REITs and its various stakes in its unlisted funds
Investment Highlights
One of Asia’s largest REIMs with coverage in over 240 cities and across more than 30 countries, … Notably, more than 80% of its AUM is concentrated in Asia, with Singapore, China and India being the core markets. Real estate AUM totalled S$115b while FUM totalled S$78b as at end-20 with the growth led by the Asia-Pacific region. Research by Hodesweill & Associates shows that institutional investors have consistently raised their target allocations to real estate annually for the past eight years, though institutions remain under-allocated to real estate in 2020, particularly in the Asia-Pacific region. In our view, there may be potential for increased capital inflows into real estate private equity funds and listed REITs, although this may be tempered somewhat by this year’s US rate hikes.
…with potential for exciting growth to continue. Historically, the company has had an impressive track record of growth: over the 2017-20 period, CLI’s FUM increased at a 15% CAGR to S$78b. As a result, fee income grew at a 12% CAGR over the 2017-20 period driven by growth in the new economy and integrated development segments while lodging units under management grew at a 20% CAGR. We forecast CLI will be able to achieve its target FUM of S$100b by 2024, implying a 6.4% CAGR over the 2020-24 period, supported by its leading listed REIM platform that manages six listed and more than 20 unlisted funds.
Proxy to reopening. While there are other reopening plays after the COVID-19 peak, we believe that CLI is an excellent proxy as it has about 83% of its AUM in traditional real estate segments such as office, lodging and retail. Lodging in particular has seen a gradual recovery in the past 12 months given CLI’s exposure to long-stay assets, and as global travel resumes, should provide CLI with upside. In addition, the company has >S$1b in new logistics and data centre funds which it has successfully raised in the past 18 months.
High EBITDA margin business. CLI’s fee income-related business contributed about 40% of revenue in 2020, supported by average EBITDA margins of 56% over 2017-20. The company has a strong and stable platform that generates fee income from its investment and asset management of listed REITs and unlisted funds, LM and PM across its asset classes. Going forward, we forecast CLI’s EBITDA margins for its fee income-related business to maintain at a steady mid-50% level.
CapitaLand’s large ecosystem maintained, assisted by an experienced management team. In Jul 21, CLI and CapitaLand (CAPL) entered into a reciprocal rights of first refusal (ROFR) agreement with the latter granting ROFR to the former to support CLI’s growth. This ROFR is exposed to a pipeline of S$7.6b in assets and allows CLI to procure these assets that CAPL or any of its subsidiaries wishes to dispose of, thus supporting CLI’s growth in the near to medium term. In addition, CLI’s management has an average of 20 years of relevant experience across the leadership team, supported by over 260 investment and asset management specialists globally.
Best-in-class in-house and asset-light platform that has seen tremendous growth. CLI has a number of brands across its global longer-stay lodging operating platform as well as dedicated leasing, facility and PM teams for its core markets such as Singapore, China and India. Importantly, the lodging platform is asset-light and is an ROE-accretive model given that 80% of CLI’s managed properties are owned by third parties and thus managed under management contracts or franchise agreements. Over the 2017-20 period, the lodging platform grew its units under management at a 20% CAGR and as at end-20, it had 123,000 units under management. CLI has targeted 160,000 units under management by 2023.
Valuation
SOTP methodology values CLI at S$4.02. We have used a sum-of-the-parts (SOTP) valuation methodology to value CLI which comprises of:
- Fee income platform: CLI earns fees from its three platforms, namely IM, PM and LM.
- Hard assets: CLI owns a number of investment properties on its balance sheet as well as its various stakes in its listed REITs and its various stakes in its unlisted funds.
IM platform valued at S$5.2b or S$0.99/share. CLI’s IM platform earns fees through the management of six listed REITs as well as over 20 unlisted funds and various alternative asset funds. In addition, the company also earns fees from managing the underlying properties of the funds and REITs.
We value this segment at S$5.2b or S$0.99/share using an EV/EBITDA multiple of 21.4x applied to our 2022 forecast EBITDA. This target multiple is slightly below that of its peer companies (Figure 6).
LM valued at S$236m or S$0.05/share. Through the company’s management contracts with property owners, CLI earns fees that are mainly generated under the globally recognised Ascott brand name and franchise. In 2019, this segment generated revenue and EBITDA of S$194m and S$69m respectively. However, as expected, this segment incurred losses in 2020 due to COVID-19. While it will take longer than expected for earnings from this segment to normalise – due mainly to COVID-19 variants impeding the reopening of economies – we nevertheless expect near- to medium-term upside when borders reopen.
We value this segment at S$236m or S$0.05/share using an EV/EBITDA multiple of 17.9x applied to our 2022 forecast EBITDA. This target multiple is a premium to its peer companies which we believe is reasonable given the long-stay nature of the business which is more resilient compared with shorter-stay hotels.
Property investment. On its balance sheet, CLI owns 21 investment properties in a multitude of segments such as retail, office, industrial and hospitality and these span across Asia, Europe, the UK and the US. We highlight that a number of these are warehoused for recycling into its own listed and unlisted funds over the medium to long term. We value CLI’s investment properties at S$6.2b (or S$1.19/share) based on the company’s last reported appraised value as at end-20. We expect to update this number after the company releases its 2021 annual results.
Listed and unlisted funds. CLI owns stakes in a number of listed REITs (Figure 7). In total, we value them at S$9.1b using our own target prices as well as consensus target prices. For the unlisted funds, we value them at S$5.9b (or S$1.13/share) based on CLI’s disclosure of its carrying values as at end-20 (Figure 8). We expect to update this number after the company releases its 2021 annual results.
Financials And Earnings Outlook
Impacted by COVID-19 in 2020, CLI rebounded in 2021 on a pro forma basis. CLI’s revenue decreased 20% to S$1.98b in 2020 vs S$2.49b in 2019 due to the COVID-19 pandemic.
Exhibiting resiliency, revenue from its fee income-related business increased 2%, or S$16m, in 2020 mainly attributable to the full-year contribution from the ASB fund management platform acquired in Jun 19, partially offset by lower income from serviced residence management and transactional fees due to reduced activities during the year as a result of the pandemic.
Revenue from real estate investments fell 29% to S$1.31b (2019: S$1.86b). The pandemic dampened the economic and operating environment in many countries, consequently negatively impacting the performance of CLI’s investment property portfolio, particularly the mall, office and lodging properties. In total, tenant support relief measures by way of rental rebates amounted to S$28m for the company’s Singapore-, China- and Malaysia-based tenants.
CLI’s EBITDA for 2020 was a loss of S$33m (2019: profit of S$2.46b) primarily due to the revaluation losses from the company’s investment properties and impairment of investments which are non-cash in nature and principally stemmed from the extraordinary events relating to the COVID-19 pandemic that materially affected CLI’s businesses. Excluding the impact of revaluation and impairment, CLI registered EBITDA of S$1.34b.
Better performance in 1Q21. While revenue decreased 11% yoy to S$516m for 1Q21 vs S$578m for 1Q20, we highlight that revenue from the fee income-related business increased 9% or S$19m in 1Q21, mainly attributable to higher fee income from the acquisition- and divestment-related transactions undertaken by its listed funds and unlisted funds. Performance was dragged down by real estate investments with revenue falling 21% yoy or S$85m in 1Q21 – this was mainly attributable to the lower contribution from CLI’s lodging business as stricter travel restrictions took hold in various countries.
At the EBITDA level for 1Q21, CLI generated S$378m, an 11% yoy increase as a result of higher fee-based income, lower rental rebates granted to tenants in China, COVID-19 grants received from governments in Singapore, Australia and Europe, as well as the forfeiture of deposits received.
Positive free cash flow generation in 1Q21. In 1Q21, CLI’s operating cash flow totalled S$205m vs cash outflow from investing activities of S$114m. This resulted in free cash flow of S$91m, demonstrating good post-COVID-19 recovery prospects for the company.
Comfortable debt levels. CLI’s total indebtedness as at 31 Mar 21 was S$15.4b, consisting of S$7.7b in loans from related companies, S$6.3b in bank borrowings and S$1.4b of debt securities. We forecast that the company’s net debt/equity levels will decline over the next three years, from 54.7% in 2021 to 43.9% in 2023.
Dividend policy. In its Introductory Document from May 21, the company stated that it has adopted 30% payout of its annual cash profit after tax and minority interests (PATMI), after considering a number of factors, including its level of cash and reserves, results of operations, business prospects, capital requirements and surplus, general financial condition, contractual restrictions, and other such factors. Thus, we forecast the company to generate a yield of 1.7-2.3% over the 2021-23 period.
Risk Factors
We see the following as the key risks, among others.
Adverse impact of natural calamities, outbreak of communicable diseases and pandemics/epidemics. Natural calamities, outbreak of communicable diseases and pandemics/epidemics could result in sporadic or prolonged market and/or supply disruptions, an economic downturn or recession, volatilities in domestic and/or international capital markets, and may materially and adversely affect Singapore and other economies. The occurrence of any of these events or developments may materially and adversely
affect CLI’s businesses, financial condition and results of operations. Such events have in the past led to restrictions in human movement and thus lower demand for CLI’s assets, thereby leading to lower occupancies, softer rents and other adverse effects.
Risks relating to growth and expansion. CLI’s future operating results will depend on, among other things, its ability to manage growth. As part of its future plans to expand both geographically and operationally, there are inherent risks and uncertainties that require significant management attention and company resources, and may not yield the expected results. Acquisitions, JVs, strategic partnerships and reorganisations entail risks resulting from the integration of employees, processes, technologies and products. Such transactions may give rise to substantial administrative and other expenses.
Political, regulatory, economic and currency risks. Most of CLI’s business activities are concentrated in the Asia-Pacific region, mainly in Singapore and China as well as various parts of Europe and the US. CLI is exposed to risks inherent in doing business in these jurisdictions and its earnings, prospects and value of managed assets may be materially and adversely affected by a variety of conditions and developments, including (but not limited to): a) inflation, interest rates and general economic conditions; b) Governmental policies, laws and regulations, particularly those relating to asset and fund management,
marketing, fund raising and real estate, and changes to such policies, laws and regulations; c) difficulties and costs of staffing and managing international operations; d) price controls; e) currency and interest rate fluctuation; and f) potentially adverse tax consequences among others.
Evolving trends in the retail sector, such as online shopping and other uses of technology. Evolving trends may affect business models, sales and profitability of retailers and could adversely affect the demand for retail real estate and occupancy at retail properties. There is no assurance that CLI can be successful in adapting its business model to take into account such evolving consumer purchasing habits. Should CLI be unsuccessful, it may experience a decline in profits for its brick-and-mortar businesses, leading to the closure of underperforming stores by retailers and causing a decrease in demand for retail space in its retail properties and integrated developments, which may result in a decline in rental and occupancy rates.
Competition in key markets. CLI’s commercial, retail, business parks, industrial, logistics and data centre real estate properties and lodging businesses operate in a competitive environment. Among other things, it faces increasing competition in the real estate and lodging markets and the real estate investment management business. Many of its competitors, particularly those in the fund management business, are substantially larger, offer more comprehensive lines of products and services, and have considerably greater capital, financial, technical, marketing and other resources than are available to the group.
Risks associated with debt financing. As at 31 Mar 21, CLI had a total combined debt (excluding lease liabilities) of S$7.7b, including S$858m which is due to be repaid, refinanced or rolled over in the next 12 months. An increase in indebtedness and associated costs of interest may result in, among other things, impairment of its ability to obtain additional funding and/or refinancing, inability to recycle its assets, and may materially and adversely affect its businesses, financial condition and results of operations.