Maybank Securities analyst Krishna Guha has upgraded CapitaLand Investment (CLI) 9CI to “buy” following the release of its results for 1HFY2023 ended June, as he believes risk-reward is favourable.
“While the deal-making environment is difficult, the rebounding lodging business, steady stream of fees from an asset-light business model, supportive policy in China, plateauing interest rates and reasonable valuation [at] 17% discount to revalued net asset value (RNAV) and 4% yield makes us alter our stance,” writes Guha in an Aug 14 note.
That said, Guha lowers his target price to $3.50 from $3.65 previously, owing to new assumptions and forecasts.
CLI posted earnings of $351 million for 1HFY2023, down 19% y-o-y. While operating profit was steady, the company booked lower portfolio gains. Revenue in the same six months dipped 1% y-o-y dip to $1.35 billion. Key drivers faced crosswinds from challenging capital markets and a recovering lodging market, says Guha.
Fees from the management of lodges rose 14% h-o-h and 35% y-o-y, led by 1% h-o-h and 17% y-o-y increase in rooms in operation, broad-based y-o-y growth in revenue per available unit (RevPAU) and higher fees per key, estimated to be up 5% h-o-h and 16% y-o-y.
While RevPAU growth slowed h-o-h, possibly due to seasonality and high-base effect, this was offset by higher management revenue, notes Guha. Lodging business on CLI’s balance sheet appears to be more focused on profitability with a significant moderation of topline by Guha’s estimates.
See also: CapitaLand Investment reports lower 1HFY2023 earnings with reduced portfolio gains
CLI’s 1HFY2023 fee-based revenue grew 9% h-o-h and 2% y-o-y to $519 million. Fees from the funds business fell 13% y-o-y.
10% growth in recurring fees from listed REITs and private funds was more than offset by decline in event-driven fees due to a cautious deal-making environment.
Property management fees were steady, while funds under management grew 1% h-o-h and 3% y-o-y to $89 billion, with growth driven by private funds, up 4% h-o-h and 12% y-o-y to $29b billion.
While fund commitments grew to $10 billion, deployment remains slow. 1HFY2023 fee rate dipped to 45 basis points (bps), down 7 bps y-o-y, and ebitda margin for the fund management business fell to 47% compared to 61% a year ago. Lower performance fees affected both.
CLI and an investor partner with a 50% stake launched a second India Growth Fund with a focus on business parks and targets a fund size of $525 million. CLI is likely to have a 20% stake, notes Guha. The seed asset for the fund is a 70% stake in a Chennai business park from the sponsor.
Guha values CLI using sum-of-the-parts methodology, with an unchanged holding company discount of 10%.
The $3.50 target price implies 3.8% dividend yield and a price return of 10% from the current price. “While headwinds persist and there are a lack of catalysts, the rebounding lodging business, steady stream of fees from an asset-light business model, policy support in China, plateauing interest rates and reasonable valuation make risk-reward favourable, in our view,” writes Guha.
As at 12.38pm, shares in CapitaLand Investment are trading 10 cents lower, or 3.1% down, at $3.08.
