DBS Group Research analysts Derek Tan and Dale Lai are reiterating their “buy” call on CapitaLand India Trust CY6U (CLINT), with an unchanged target price of $1.45, citing the REIT’s “robust growth potential” as a key factor for their investment thesis.
Tan and Lai say that CLINT is one of the fastest growing REITs with a projected three-year distribution per unit (DPU) CAGR of 7%, mainly on the back of recovering cash flows in its portfolio and planned acquisitions and developments within its pipeline of projects.
CLINT’s operational performance for 1HFY2023 ended in June, saw a gross revenue and net property increasing by 18% and 13%, to INR6,795 million ($110.19 million) and INR5,265 million respectively.
“The increase was driven by a combination of higher portfolio occupancy rates of about 94% and income contribution from the acquisitions of an industrial facility in Mahindra World City, Block A of International Tech Park Hyderabad (ITPH), and International Tech Park Pune in Hinjawadi (ITPP-H),” the analysts say.
Rental reversions generally stayed robust, ranging from -10% – due to the expiry of certain short-term leases – to 4% and with a high range of 9%-20% for its properties in Hyderabad, according to the analysts.
On rental growth, the analysts note that rents have increased by 6%-16% across the portfolio, implying that leasing spreads are likely to be expanding, with more positive reversionary prospects. This puts the company on a stronger footing for 2HFY2023, they add.
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“CLINT is well positioned for the next leg of growth with the recent completion of the acquisition of its sponsor’s asset in Pune with an additional gross floor area growth of over 60% in the coming years,” say the analysts.
On that basis, they see CLINT emerging as a diversified new economy play, offering exposure to information technology parks, industrial property, warehouses, and data centres.
However, the strong underlying performance was eroded by close to a about 10% appreciation in the Singapore dollar versus the India rupee, according to the analysts.
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As such, income available for distribution after retention was 11% lower y-o-y (-2% in INR terms), compounded by higher overall interest costs, which rose by about 35% on the back of the recent acquisitions and development completions.
Distribution per unit (DPU) declined by 22% to 3.36 Singapore cents due to an enlarged share base as a result of the impact of the preferential offering. Stripping that out, DPU in Singapore dollar terms would have declined by about 13%, mainly due to the forex impact, say Tan and Lai.
That said, the analysts say that “currency is the key culprit” for CLINT’s DPU missing their estimates, which they have priced at a slight 5% premium as compared to the spot rates of the Singapore dollar versus Indian rupee rate of INR61-INR62 to $1, versus INR58 to $1.
Meanwhile, the analysts also note that CLINT’s financial metrics are expected to strengthen post fundraising. With gearing remaining steady at 40% and expected to dip to 36% following the recent preferential offering exercise, CLINT has the financial flexibility to execute its development and acquisition activities.
“The interest coverage ratio remained stable at 2.7 times (vs. 2.9 times a quarter ago) while overall interest costs remained at 6.3% and should remain stable going forward. Overall, we see strengthening gearing levels on the back of the completion of Block A, Hyderabad and the strengthening of overall portfolio cash flows,” they say.
As at 11.31am, shares in CLINT are trading 2 cents lower, or 1.77% down at $1.11.
