<Alert> Three reasons why we still like CapitaLand Investment Limited (“CLI”)
- Overall transaction volume of S$3.8bn YTD in 2023, with the group in a net investment phase (+S$2.6bn acquisitions; -S$1.2bn in recycling) with its private funds actively deploying capital and growing AUM
- Divestment of S$1.2bn tracking below full-year target but unlikely to be a dampener in our view, given sub-optimal values to be achieved in 2023
- Lodging portfolio remain robust and on a firm uptrend with RevPAR up +25% with potential surprises in store
- BUY call and TP S$4.25 maintained
Operational performance in line.
CapitaLand investment Limit (“CLI”) performance year-to-date (“YTD”) remains steady with total revenue coming in at S$2.0bn with the Fee-income related business revenue rising by +9% y-o-y to c.S$800m, which partially offset the dip in real estate investment business (-8% to S$1.4bn ). Revenues are tracking in line with our estimates, forming c. 75% of our estimates. A large part of the revenue increase in fee income comes from Lodging management fees on the back of a robust 25% rebound in RevPAR and key count while its overall (REIT management and private funds) fees remain resilient.
What is our view.
The group is a net-investor in 2023 with its private funds and selected REITs active in growing their portfolio and opportunities for growth remains given close to s$10bn of funds yet to be deployed. We see the launch of new private equity fund products (healthcare, datacenter and private credit space) in the coming months to be catalysts for stock for re-rate. While its divestment target of S$3.0bn could be missed, we see investor looking past that, given a more subdued liquidity environment meant sub-optimal returns potential. Maintain BUY, SOTP valuation of S$4.25.
Key questions answered in management call.
Valuations – Australia (negative); US/EU (negative) ; India (positive)
While financials have continued to remain resilient, we expect the group to report weaker PATMI in 2023 on the back of potential revaluation losses as its book get marked-to-market due to higher interest costs. At this moment, there could be downward revaluations from Australia, UK, Europe and USA (forming c.20% of AUM) due to cap rate movements, while its exposure within China (31% of AUM) is likely to see mixed valuation returns (with slight expansion in cap rates offset by strong upside to cashflows). Within Asia ex-China (18%) and Singapore (29%), valuations are expected to remain fairly resilient.
Where are deployment opportunities?
The group have been a net investor in 2023 with over S$3.8bn in transactions (+S$2.6bn of purchases and -S$1.2bn in divestments). We note that both the group’s private equity funds and listed REITs (namely CLAR, CLINT) form the bulk of transactions which bodes well for CLI’s model of being able to be active in growing across market cycles. Looking ahead, the group has raised S$1.7bn from investors is looking to deploy capital in the South East Asia region with markets like India and China are key markets that the group funds will be keen to deploy. In terms of new fund products, building on a recent launch of the group Wellness & Healthcare related fund (target fund size of S$1.0bn with upsize option), the group looks to expand more in this space in developed markets. In addition, CLI is also in preparation for the launch of its first “private credit fund” focused on Australia soon. Overall, the group has met its S$100bn (including embedded) AUM target by 2024 and will have more updates on its next leg of growth.
Divestment target miss – but does it matter?
The group have divested close to S$1.2bn worth of assets (gross development value) in 9M23 which we estimate to be close to book value. While initially guiding for an annual S$3.0bn divestment target in 2023, we believe that given the still uncertain interest rates and liquidity environment, the continued pursuit of divestments could mean sub-optimal returns overall. Trading off with a potential drag on “lower returns” in the immediate term, we believe that the group is better placed to wait-out for a better period in order to pursue optimal overall returns.