Over the last three months, CapitaLand Investment (CLI) 9CI has fallen 8.5%, lagging the Straits Times Index’s (STI) 1.2% decline. JP Morgan analysts Mervin Song, Terence Khi and Cusson Leung believe the market is “too bearish” in pricing in a 10% funds under management (FUM) decline, “considering private funds increased FUM by $1 billion to $29 billion in 1Q2023”.
CLI will report its earnings for 1HFY2023 ended June before the market opens on Aug 11. The JP Morgan analysts expect a double-digit y-o-y decline in 1HFY2023 core patmi owing to the high base effect, forex headwinds and higher borrowing costs. “We would recommend buying on any share price weakness post-soft 1HFY2023 results.”
CLI has had about an 80% correlation to China stock indexes over the past 12 months, they note. “That said, while sentiment on CLI and China’s prospects are weak at the moment, we remain hopeful that we see more positive news flow and business momentum in 2HFY2023 and heading into 2024 as property values adjust presenting more investment opportunities which should drive greater interest from investors to deploy capital.”
The JP Morgan analysts believe a “significant amount” of negatives have been priced into CLI’s share price with various factors that could “easily” drive share prices higher. “These would include further growth in FUM, evidence of Singapore values holding up, a turnaround in the current negative China sentiment and the Fed pausing its rate hikes.”
Healthy interest, especially from onshore Chinese investors, remains present albeit some investors are fearful of “catching a falling knife”, notes JP Morgan, “as indicated by other real asset managers such as ESR Group”.
Furthermore, CLI’s hospitality business, which achieved its target of 160,000 units under management one year ahead of target, should continue to benefit from the continued recovery in the global hospitality market, they add.
Hence, the JP Morgan analysts maintain “overweight” on CLI in a July 21 note, with a lower target price of $4 from $4.40 previously.
“As a leading real estate investment manager (REIM) with FUM of $89 billion, we believe CLI is well-positioned to take advantage of tailwinds from growing demand for real estate investments. We project FUM to grow by 4% p.a. to $95 billion close to CLI’s $100 billion target by 2024,” they write.
Combined with an upturn in the lodging business on the global travel recovery and a 15% jump in lodging units under management to 109,000 units by 2024, partially offset by impact of higher borrowing costs, JP Morgan estimates “decent” 1%-2% p.a. growth in core patmi with CLI offering an “attractive” 4% yield.
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“We see value being unlocked as CLI progressively disposes of its $9 billion investment property portfolio recycling the proceeds into co-investments for its new private funds,” they add.
As at 10.10am, shares in CapitaLand Investment are trading 4 cents higher, or 1.18% up, at $3.42.
