2021: A Strong Set Of Numbers For Its Maiden Results
There was much to admire in CLI’s 2021 results: PATMI of $1.3b vs a loss in 2020, material divestments of S$13.6b, the S$0.15 dividend, continued decline in gearing to 0.48x as at end-21 and fund management EBITDA margin remaining well above 50%. Going forward, we expect CLI to continue to witness strong growth in its funds under management as well as fee income-related businesses. Importantly, we expect lodging to drive earnings growth in the near term. Maintain BUY. Target price upgraded to S$4.13.
RESULTS
• A strong set of maiden results. CapitaLand Investment’s (CLI) reported 2021 revenue of S$2.3b (+16% yoy) and core PATMI of S$497m (+12% yoy) were slightly ahead of our expectations. The strong numbers were the result of a broad based recovery in CLI’s assets with higher contributions from both its fee-income related business (FRB) as well as its real estate investment business (REIB). Including portfolio and revaluation gains, the company’s PATMI swung from a loss in 2020 to a profit of S$1.3b.
• Better-than-expected dividends. The company declared a total dividend of S$0.15/share comprising S$0.12 ordinary dividend and S$0.03 special dividend, implying a 57% payout ratio. During the results briefing, the company stated its belief that it will be able to generate a healthy core PATMI to pay a S$0.13 dividend for at least the next two years.
STOCK IMPACT
• Lodging – potentially a major earnings driver for CLI in 2022. While this business continued to experience difficult operating conditions in 2021, CLI nevertheless still progressed the build-out of its long-stay business as well as the moving into adjacent segments such as purpose build student accommodation (72% of its lodging investment in 2021 was in this segment). Over the course of the next 12-18 months, we should see the return of international travel which should then allow margin expansion in CLI’s lodging assets as well as higher ROE. During the analyst call, management stated that this business could generate about S$150m in EBITDA vs our current 2022 and 2023 estimate of S$48m
and S$78m respectively.
• Private funds will be a focus. With seven new funds incepted in 2021 (totalling S$1.4b in external capital), management stated that it had received very encouraging support for its private funds and thus is seeing more investor interest. In particular, it highlighted a special situations fund in China, a China data centre fund (as well as other data centre strategies in Asia), credit strategy in commercial and residential spaces in China and possibly Australia, as well as renewable energy and energy transition funds.
• Targeting a sustainable ROE. A sustainable double-digit ROE is within CLI’s medium- to long-term reach in our view. In the near to medium term, the company will need to continue to use its balance sheet to seed its private equity funds; given that it does not have a track record, it will need to inject more equity and thus an ROE in the +15% range will necessarily take longer. Thus, in the short term, more capital will be needed for the private equity business given its small size of S$26b while on the public funds businesses, CLI is arguably overcapitalised; thus it will look to rebalance over time.
• A more than solid year for divestment. CLI divested S$13.6b worth of assets in 2021 (2020: S$3.04b). However management cautioned that this will not be repeatable in 2022 as market conditions have changed, and highlighted that its annual capital recycling target remains at S$3b. In 2021, the company sold out its assets at a very opportune time with average divestment premium above carrying value of 13% vs 8-10% historically. Note that in 2021, 70% of the divestment value was related to integrated developments while 56% of CLI’s total invested value of S$6.8b was in new economy assets.
EARNINGS REVISION/RISK
• Upgrading earnings. We have upgraded our 2022 and 2023 earnings by 5% and 8% respectively to account for a slightly faster recovery in CLI’s lodging segment as well as slightly better margins in its fund management business.
VALUATION/RECOMMENDATION
• Maintain BUY with higher target price of S$4.13. We value CLI at S$4.13/share (previously S$4.02) using an SOTP methodology which comprises of: a) its fee-income platform where CLI earns fees from its investment management, property management and lodging management platforms, and b) its investment properties which CLI accounts for on its own balance sheet, as well as its various stakes in its listed REITs and its various stakes in its unlisted funds.
SHARE PRICE CATALYST
• Cap rate compression and stronger-than-expected growth in its funds under management.
• Recovery in lodging business from the further reopening of regional and global economies.