Can it exceed S$100bn by 2024?
? Post restructuring, CLI offers investors greater earnings visibility and higher
ROEs of c.4.4-5% over FY22-24F vs pre-restructuring c.3-4% over FY17-20.
? We think reaching S$100bn FUM from current S$86bn by FY24F is doable
based on existing pipelines.
? Exceeding the target is possible, from private equity FUM growth and M&A
opportunities. Initiate coverage with an Add rating and TP of S$4.59.
Initiate coverage with an Add rating and TP of S$4.59
We initiate coverage on CLI with an Add rating and TP of S$4.59, pegged to an assumed
10% discount to a sum-of-parts RNAV of S$5.10 (see pg 14 for details). We forecast a 16%
CAGR in operating PATMI (before portfolio gains and revaluations) over FY21-24F, driven
by growth in funds under management (FUM) and fee income, efficient capital deployment,
and improved operating performance of its investment and lodging properties as borders
reopen. We believe this will underpin ROE expansion from operating PATMI from 3-4%
(between 2017-2020) to c.5% by FY24F (see Fig 26) and narrow its current valuation gap
vs. peers. Key downside risks include slower-than-expected scaling up of its FUM or
dampened real estate outlook that could weaken its fund performance and hamper its pace
of capital recycling activities.
Can the S$100bn FUM target be met?
We think yes. CLI targets to expand its FUM to S$100bn by 2024F from S$86bn as at end1Q22, underpinned by accelerated third-party fund raising and a visible recycling pipeline
of S$10bn worth of directly held investment properties, which are mainly operational, that
could serve a pipeline of assets for its fund vehicles over the next 2-3 years. YTD, CLI and
its REITs have recycled S$1.6bn of capital, of which 80% has been retained as FUM, and
have acquired $0.6bn of third-party assets. Whilst some near-term concerns have been
raised on CLI’s exposure to China (32% of FUM as at end-1Q) given the country’s Zero
Covid policy and slowing GDP growth, we believe CLI’s long-term positive outlook remains
intact, and management continues to be on the lookout for recycling and investment
opportunities outside of the Capitaland ecosystem. Furthermore, CLI has a strong balance
sheet with gross cash of and undrawn facilities of S$8.1bn at end-1Q22 that could be
deployed for any distressed opportunities.
Improving capital efficiency should further re-rate share price
Our RNAV is derived based on i) marking to market CLI’s investment properties and its
stakes in its private funds, ii) ascribing a value to its fund management and lodging
management business, as well as pegging its stakes in listed REITs to our TP or market
price. CLI is currently trading at 20.8x CY22F P/E, above the average peer multiple of
18.3x, but its FY22F P/BV is lower at 1.15x (peer average: 2.35x). In addition, its FY22F
EV/EBITDA of 16.4x is slightly higher than the peer average of 15.2x. We believe this is a
function of CLI’s hybrid real estate investment management (REIM) model, with 63% of its
gross asset value (GAV) exposed to on-balance sheet investment properties and stakes in
its sponsored REITs while its fund management business made up only 23% of its GAV
and contributed only 22% to its FY21 EBITDA. We believe that as the group i) lightens its
balance sheet by recycling its assets to realise the value of its properties, ii) improve its
capital efficiency by moving towards a more asset light model, and iii) accelerate the growth
of its private funds business to boost its fund-fee rate, its ROE and P/BV multiples will rise
in the longer run and the valuation and RNAV gap will narrow.