Waiting for the right time and opportunity
Key highlights of CapitaLand Investment Limited
Investor Day 1:
Patience turns out to be the most valuable virtue for 2022.
Keeping the dry powder in 2022 as the ongoing rout in the equity markets amidst aggressive rate hikes in the US and corresponding rates hikes from central banks across the world has driven funding costs higher globally. Coupled with political uncertainty from the Russia-Ukraine conflict driving up energy prices (fuelling inflation) in Europe, the operating climate is now highly uncertain with parts of the global economy expected to head into an economic slowdown (or recession in 2023). With higher funding costs and possibly tighter credit environment, this is expected to cool the exuberance in asset price growth that we seen in the past few years.
The management of CLI has been patient in their capital deployment approach this year but has instead built up its arsenal of deployable capital since the restructuring of the group a year back. The group has built up its capability and resources and have launched 8 new funds with S$1.7bn in funds under management (“FUM”) raised and will be looking to grow FUM organically and inorganically in the coming quarters. Most importantly, we see the group diversifying its capital pool, working with new partners in Asia (source of capital in RMB, KRW and JPY) where the group can partner going forward. We believe that investors will see the group capturing opportunities in the midst of the current volatile, tighter credit environment.
Managing through Volatility, Uncertainty, Complexity and Ambiguity (“VUCA”)
The group has maintained fiscal discipline and has significant capacity of cash and bank lines to support its opportunities and business operations to the tune of S$7.4bn. The group has a net debt to equity of 0.51x and maintain a robust interest coverage ratio (“ICR) of 4.9x, maintaining prudence in maintaining a steady financial profile (2.8% cost of debt, 66% fixed with 2.8 years of maturity).
Instead of aggressively pursuing growth, CLI and its REITs have instead focused on optimising returns internally through redevelopments, asset enhancements and re-purposing their portfolio in order to create total returns for investors. Over time, the group aims to divest opportunistically (target S$3.0bn a year) but will do so only if there are re-deployment opportunities to optimise return on capital. With a headroom of S$3.7bn to a (0.7x debt-to-equity ratio), the group has ample capacity to deliver returns to shareholders.
Onward the sustainability journey.
We had the opportunity to also gain an insight on the group’s sustainability journey and find that the group have placed sustainability as one of the pillars in their investment decisions and integrate it in the entire real estate life cycle and look to consistent refine its internal processes over time. In the medium term, we see the group’s focus on sustainability to be a competitive advantage when compared to its peers.
Travel rebound – Reaching for the stars
There was a great deal of optimism within the hospitality sector (Ascott Limited) with most countries globally lifting their travel restrictions since the middle of the year. Themes like “revenge travel” and with most hospitality players playing catch up with the spike in demand for travel, we have seen a strong run-up in RevPARs in 1H22 with the trend expected to continue in 2H22 and beyond. Over time, Ascott Limited remains firmly on track to ride on the robust rebound in travel demand (leisure + corporate travel) come 2H22 and is expected to post one of the strongest halves in terms of RevPAR performance. With the acquisition of Oakwood portfolio, Ascott Limited remains on track to achieve its target of 160,000 units under management by 2023.
Thoughts on the stock.
Recent market weakness has brought the stock down by over 20% since Aug’22 and CLI is now trading at 1.1x P/NAV, one of the lowest since its listing post restructuring. We see catalysts emerging for the stock upon (i) gradual re-opening of China which will drive a re-rating of its operational performance of its China business, (ii) launch of new fund initiatives which will drive FUM growth and (iii) share buy-backs which will support the recent weakness in share price.