Donavan Tan of OCBC Investment Research has initiated coverage of CapitaLand India Trust with a "buy" call and fair value of $1.18, citing this counter as one investors can consider to ride the wave of India's growth.
In his March 19 note, Tan points out that CLINT operates in the fastest-growing emerging market, India.
It was the first listed Indian property trust established in Asia and focuses on the IT industry with nine clusters of IT parks across major cities like Mumbai, Hyderabad, Bangalore and Chennai.
"Notably, within the defensive S-REITs sector, CLINT stands out among Singapore listed property trusts due to its progressive portfolio expansion and revenue diversification," writes Tan.
Over the years, CLINT has successfully ventured into logistics, and industrials, and it also has a steady pipeline of developmental projects, including data centre developments.
Tan likes CLINT for its forward-looking strategies that position it along the beneficiaries of India’s growing economic sectors of e-commerce, data localisation and digital payments.
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CLINT’s aggressive acquisition strategy to secure a pipeline of strategically placed properties through forward purchases can potentially propel its growth amidst a challenging credit environment, although it will have to bear development risks, the analyst adds.
In its 2HFY2023, CLINT grew its gross revenue by 15% y-o-y to $123.6 million and net property income by 13% y-o-y to $90.4 million.
No thanks to higher operating and upkeep costs, its margin dipped, and also due to higher financing costs, distributable income dropped 10% and correspondingly, DPU for FY2023 was down 21% to 6.45 cents.
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Nonetheless, Tan sees CLINT riding on an "uncapped potential" of tailwinds, with a track record since inception of growth.
The analyst, citing the management, notes that CLINT has plans to increase its gross leasing area by 54% over the next five years.
Under revised policies, CLINT can attract a wider variety of tenants.
In FY2023, CLINT reported strong double-digit rental reversions in its properties except for Chennai due to the expiry of short-term leases done at above-market rates.
"We anticipate this momentum to continue amidst a bullish 2024 macro-outlook for India, with its 4Q23 GDP print surpassing expectations yet again and rising over 8% YoY for the third consecutive quarter.
"With 15% lease expiry approaching in FY2024, CLINT is well positioned to benefit from the positives of rental growth. The amalgamation of GLA growth, occupancy resiliency and positive rental outlook sets the stage for a future of uncapped potential, propelled by favourable tailwinds," the analyst says.
Tan's $1.18 fair value for this counter is based on the dividend discount model (DDM) methodology, with a cost of equity assumption of 9.17%, terminal growth rate of 2.5%, and a slight ESG valuation premium.
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At this level, the fair value of $1.18 implies a price-to-book (P/B) ratio of 0.90x.
Tan projects a distribution yield of 6.6% for the current FY2024, up 4.9% over FY2023, with growth to be driven by several planned acquisitions that are anticipated to be completed and contribute to rental income in the current year.
At current valuations, CLINT is trading at a consensus forward 12-month P/B of 0.87x, approximately 1.37 standard deviations (s.d.) below its historical average 3-year average forward P/B of 1.09x.
"We believe this presents an attractive entry point for long-term investors seeking to add exposure to the fast-growing Indian economy in their income portfolio," says Tan.
CLINT units closed at $1.02 on March 19, unchanged for the day, and down 8.89% year to date.
