Positive trends but prudent approach warranted
• 1Q22 fund management fee-related earnings (FRE) jumped 28% year-on-year (YoY) to SGD132m
• Encouraging recovery for lodging management business
• Outlook for remainder of FY22 dependent on Covid-19 situation in China
Mostly encouraging 1Q22 trends – CLI provided a business update for 1Q22 which pointed to growth in many areas but an uncertain outlook ahead given the current Covid-19 situation in China. Revenue grew 16% YoY to SGD598m, driven by both its fee income-related business and real estate investment business. For the former, its fund management FRE jumped 28% YoY to SGD132m. Part of this was underpinned by its Private Funds – Event Driven segment, which saw revenue surging from SGD7m in 1Q21 to SGD36m in 1Q22. Although management mentioned that this performance should not be extrapolated for the rest of FY22 given that 1Q22 had a successful fund exit (CapitaLand Vietnam Commercial Value-Added Fund) with an impressive net internal rate of return (IRR) of 34%, we note that 68% of CLI’s 1Q22 fund management FRE was recurring in nature.
Portfolio revenue per available unit (RevPAU) rebounded 34% YoY – Another encouraging trend came from CLI’s lodging management business, which saw 1Q22 FRE growth of 31% YoY. There are currently 135k lodging units under management (as at 31 Mar 2022), of which 79k are operational. Portfolio RevPAU grew 34% YoY to SGD71 due to pent-up demand. The exception was China (flat YoY) given the Covid-19 lockdowns. Management highlighted that its 2H22 outlook is dependent on the Covid-19 situation in China, partly because new fund launches in China have been delayed and this could be rolled out once we see restrictive measures being eased.
More prudent approach in deployment of capital – Regarding the topical issue of higher inflation, management views real estate as a good inflation hedge, and believes it is fairly well-insulated from inflationary pressures given cost pass-through and potentially higher rents. CLI’s net gearing ratio remained unchanged quarter-on-quarter (QoQ) at 0.48x, but implied interest cost inched down 10 basis points QoQ to 2.6%. Although reported interest rate hedge ratio was 59%, if we exclude RMB-denominated debt (loan prime rate trending down) and expected SGD2b of debt repayment with divestment proceeds, CLI’s hedge ratio would be ~80%. Given that interest rates are on an uptrend, management said it will be more prudent in deploying capital, and has paid more attention to its sensitivity analysis on cap rates and interest rate movements. It has announced SGD1.6b of divestments year-to-date (as at 11 May 2022), which is slightly more than half its annual divestment target of SGD3b. After adjustments and factoring in CLI’s recently upgraded ESG rating, our fair value estimate increases from SGD3.90 to SGD4.13.
ESG Updates
CLI’s ESG rating was upgraded to the by ESG Research in Feb 2022. According to research, there is evidence to suggest that CLI has adopted robust environmental criteria to achieve green ratings for all its properties by 2030. CLI also invests in clean energy and energy-efficient technologies and is ahead of its peers in securing green building certifications. CLI highlighted in its FY21 annual report that 46% of its global portfolio (owned and managed properties by square metres) has achieved green building certification. Regarding the aspect of governance, reseach has scored CLI above the industry average, given that it has a fully independent audit committee to help protect minority investor rights and CLI has also adopted extensive corporate ethics policies and controls. HOLD. (Research Team)