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Analysts positive on Capitaland Investment with expectations for better 2HFY2022

·6-min read

CLI's revenue was $1.35 billion up 29.1% y-o-y in 1HFY2022

Analysts remain positive on Capitaland Investment (CLI) in spite of weaker-than-expected 1HFY2022 ended June results with PATMI declining 38% y-o-y as a result of China’s Covid-19-related restrictions.

CLI at the same time reported revenue of $1.35 billion, up 29.1% y-o-y, in 1HFY2022, boosted by higher contributions from fee-related and real estate investment businesses.

Moreover, fee-related (FRB) revenue grew 20.8% y-o-y in 1HFY2022 to $238 million, led by higher fees from listed funds as well as increased event-driven income from private funds.

UOB Kay Hian Research analyst Adrian Loh has kept a “buy” rating on CLI with an increased target price of $4.28 from $4.13.

“While some of CLI’s near-term growth outlook hinges on China returning to normal, we nevertheless believe that the company’s position remains solid with lodging and private funds management continuing to exhibit strong growth,” says Loh.

Although CLI reported 1HFY2022 revenue that was in line with the analyst’s estimates, its PATMI of $433 million down 38% y-o-y was weaker than expected as it formed only 41% of Loh’s full-year estimates. “This was due to the China malaise of  the country’s Covid-19-related lockdowns delaying CLI’s planned capital recycling deals in 2QFY2022 which resulted in a lower level of portfolio gains in 1HFY2022 compared to 1HFY2021, and higher levels of rental rebates for its retail assets,” Loh adds.

CLI is observed to experience a lodging resurgence, with CLI increasing its units under management by 10% with  over 7,500 units signed, as well as the acquisition of the Oakwood Worldwide portfolio which brought in another 15,000 units into its fold.

“With a total of 153,000 units in its portfolio, CLI is well on track to hit its 2023 target of 160,000 units,” says Loh. This is coupled with how the overall travel environment has continued to improve as many countries regionally and globally have relaxed travel restrictions as Covid-19 infections have waned.

As such, CLI has witnessed a 44% y-o-y increase in revenue per available unit (RevPAU) to $82 in 1HFY2022.

While the group’s China retail assets were a drag in 1HFY2022, CLI’s business park assets had positive rental reversions. In addition, the company launched its first onshore renminbi fund in 1HFY2022 and will look to launch more of such renminbi funds in the near term.

CLI also disclosed that large experienced fund managers continue to have a reasonably healthy appetite for investing in China via CLI’s private funds, while the smaller funds have largely taken a risk-off mode for China. “We also note that US funds are currently underweight on China and have evinced interest in increasing exposure in the near to medium term,” says Loh.

“With $1.6 billion worth of capital recycling achieved year-to-date (ytd), CLI remains optimistic that it can hit its annual target of $3 billion for 2022,” writes Loh. In 2QFY2022, China was the key drag with zero capital recycled despite having over RMB5 billion (1 billion) in deals that the company had in the pipeline, but which had to be deferred.

CGS-CIMB Group Research analyst Lock Mun Yee has kept an “add” rating on CLI with an unchanged target price of $4.59.

Lock observes that CLI’s balance sheet remains robust, with net gearing of 0.51x at end-1HFY2022.

“Looking ahead, CLI indicated that it has some $3.5 billion of embedded funds under management (FUM) from committed and undeployed capital for private funds,” says Lock. CLI’s FUM remained flat q-o-q at $86 billion.

Additionally, CLI has divested $1.6 billion and made $2.5 billion worth of investments to date. Despite the slower investment environment amid global macro uncertainty and rising interest rates, CLI indicated that it could achieve its $3 billion asset recycling target for the year. Its aim to reach $100 billion of FUM by FY2024 remains unchanged.

The analyst leaves her FY2022-FY2024 earnings per share (EPS) unchanged and believes that as CLI continues to lighten its balance sheet and accelerate the growth of its fee income business, there is room for a further re-rating of the valuation of its fund management business.

DBS Group Research analysts Derek Tan and Rachel Tan have kept a “buy” rating on CLI with an increased target price of $4.30 from $4.

“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,” write the analysts.

In addition to robust growth in its operational footprint to 160,000 units by 2023, Tan and Tan see a turnaround in cash flows, as the reopening of international borders is expected to drive the lodging business back to profitability.

Maybank Securities analyst Chua Su Tye has also kept a “buy” rating on the REIT with an unchanged target price of $4.30.

“We see strong earnings growth supporting valuations for the REIT, which are undemanding as compared to its peers,” writes Chua. “Further ahead, we see accelerating FUM growth, expanding fee-related earnings (FRE), and faster conversion of on-balance sheet assets to FUM creating earnings upside.”

Chua observes that the REIT’s Ebitda contribution from China fell to 12% in 1HFY2022 as compared to 28% in FY2021 as recycling plans were deferred to 2HFY2022.

CLI also launched a maiden RMB700 million special situation opportunity fund (CSSRF I) to acquire a $144 million office asset in Shanghai, and is eyeing FUM growth opportunities in India, real estate credit, data centres, and lodging.

PhillipCapital Research analyst Glenn Thum has kept an “accumulate” rating on CLI with an unchanged target price of $4.12.

Thum observes that CLI’s listed funds posted up 7% and down 15% growth in recurring and transaction-related fees respectively, where the latter was the result of a high base in 1HFY2021, as transactions picked up after the pandemic year.

“CLI’s real estate investment and lodging management business should continue to recover on the back of further easing of travel and mobility restrictions,” writes Thum. “Having divested $1.6 billion YTD, CLI is on track to hit its annual divestment target of $3 billion.”

The analyst adds that its 10% FUM growth target however may be at risk given the current macroeconomic and geopolitical headwinds which have resulted in more circumspect behaviour among capital investors.

Thum also foresees that prolonged lockdowns in Shanghai and Beijing may also delay planned transactions.

As at 4.53pm, units in CLI are trading at 3 cents down and 0.78% lower at $3.84 at a FY2022 P/B ratio of 1.2x and dividend yield of 2.3% according to UOB KayHian’s estimates.

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