Citi Investment Research and DBS Group Research analysts have maintained their “buy” calls for CapitaLand Investment (CLI) with target prices (TPs) of $4.67 and $4.30 respectively.
Brandon Lee of Citi says now is not the time to “throw caution to the wind” and that he is “encouraged” by CLI’s confidence in hitting its $100 billion funds under management (FUM) objective by 2024.
His target price of $4.67 for CLI is set at a 10% discount to his restructured net asset value (RNAV) of $5.19, which is significantly lower than where the stock traded pre-restructuring, at a five and 10-year mean discount of 38% and 35%, due to a simpler business model post-restructuring.
“CLI remains confident of hitting $100 billion FUM by 2024, but will not do it at all costs. With share prices under stress, CLI thinks this is not the time for REITs to raise equity, but they could reconstitute their portfolio, which we believe refers to asset enhancement initiatives (AEIs), asset redevelopments and/or asset sales,” says Lee.
On the private side, CLI continues to diversify its capital pools outside of the SingDollar through S-REITs, the USD through US partners and RMB through onshore funds, into Korean won with eight funds currently and Japanese yen with a single fund at present.
“CLI is seeing a mismatch in the capital pool in China, where there are currently pockets of opportunities, which it is starting to capitalise on via its onshore fund license due to dislocations but less interest from USD capital investors, mitigated by interest from Middle East and Asia,” he adds.
Positively, Lee notes that CLI expects more capital to be allocated to China in 2QFY2023 from investors in the US and Europe who are now taking a wait-and-see approach, while China’s onshore capital — especially from sizeable life insurance funds — will expand domestically and overseas in the next five to seven years given the lack of products and low 5% allocation to real estate.
Opportunities are also emerging in CLI’s Japan office, with deals also being seen in retail markets in Australia and the US, he says.
Meanwhile, Derek Tan and Rachel Tan of DBS, whose $4.30 TP is based on a sum-of-the-parts (SOTP) valuation of CLI’s various businesses, believe CLI is a leading Asian real estate manager with ability to acquire across business cycles.
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“CLI is an asset and capital-efficient company with scalable fee-related earnings (FRE) and FUM platforms for growth. CLI’s private funds and REITs complement each other in terms of its acquisition strategy,” they say.
“With diverse real estate strategies ranging from being opportunistic in nature to value additions to core investments, we see CLI leveraging on opportunities during market upcycles and downcycles. Its REITs and private funds can be active across all real estate cycles,” add the analysts.
And with the lodging business “roaring” back to profitability, Tan and Tan say Ascott Limited’s global footprint is well placed to leverage on the multi-year recovery of the hospitality sector in the coming years. “On top of robust growth in its operational footprint to 160,000 units by 2023, we see a turnaround in cash flows, as the reopening of international borders is expected to drive
the lodging business back to profitability,” they explain.
For Citi’s Lee, CLI is charting a long-term path, with its short-to-medium term objectives remaining unchanged, such as 160,000 units under management by 2023, remaining unchanged. Other objectives include the $100 billion FUM by 2024 goal, as well as a 40:60 ebitda split between its fee-income related business (FRB) and real estate investment business (REIB).
Key downside risks to his analysis include negative rent reversions, occupancy declines and cap rate expansion within its portfolio of investment properties, decreasing share prices of its six listed REITs, slower-than-expected growth in FUM and overpaying for strategic acquisitions.
With their estimate more conservative than the consensus, Tan and Tan believe falling capital values and an inability to grow FUM are the key risks to their view.
As at 11.12am, shares in CLI were trading 1 cent or 0.31% up at $3.25.
