CGS-CIMB Research analyst Lock Mun Yee has reiterated her “add” rating for Capitaland Investment (CLI) with an unchanged target price (TP) of $4.59.
In her report dated Oct 17, the analyst cites CLI’s “fiscal discipline” and “patience in capital deployment”, even as the lodging management business continues to benefit from strong travel recovery as upsides to the stock.
Her valuation is based on the fact that CLI’s share price has declined 22% since its recent peak on Aug 10, with the stock currently trading at around a 1.1x price-to-net asset value ratio (P/NAV) and at a 37% discount to her revalued net asset value (RNAV) of $5.10. Her unchanged TP of $4.59 is pegged to a 10% discount to Lock’s RNAV.
“Valuations are inexpensive and we believe 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,” says Lock.
She notes that CLI has reiterated its target to deliver funds under management (FUM) of $100 billion by 2024, stressing adopting fiscal discipline and patient capital deployment amid the more volatile macro conditions.
Its balance sheet remains strong with a net debt to equity ratio of 0.51x and $7.4 billion of cash and undrawn facilities, Lock says. CLI also indicated it has potential debt headroom of $3.7 billion, based on net debt/equity assumption of 0.7x, and potential deployable capital of $9.7 billion to reach its FUM target.
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Lock explains that CLI intends to leave funding capacity for merger and acquisition (M&A) opportunities, seeding new funds, warehousing assets for its REITs and to maintain sufficient cash flow for dividends and share buybacks.
Meanwhile, she says that CLI will continue to focus on optimising returns via portfolio repositioning, such as asset enhancements and redevelopment activities, as well as tapping private equity opportunities through its diversified capital pool.
“Under its listed REITs platform, it will look to proactively manage its assets with a view to incorporate sustainability in all aspects of the trust, maintain a disciplined acquisition strategy and be prudent in capital management,” explains the analyst.
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“With its private equity fund management business, management indicated that there is still interest in real estate and alternative investments, although FUM growth may be slower as investors remain cautious during this period of uncertainty. Nonetheless, CLI is well-positioned to tap diversified funding in Asia and globally, with its RMB onshore fund management licence and local strategy in Japan and Korea,” she adds.
On top of this, Lock believes the strong recovery in global travel is likely to provide more tailwinds to the hospitality sector recovery and CLI’s lodging management business, with the group maintaining its target of achieving 160,000 keys under management by 2023 and to expand its lodging product offerings.
With a large and diversified portfolio, she notes that CLI remains a play on mega trends, such as the recalibration of retail between digital and physical, evolution of the workplace, return of international travel, structural demographic shifts and urban migration and data fragmentation and supply chain issues.
Key downside risks to her valuation include asset repricing, slower-than-expected scaling up of its FUM or a dampened real estate outlook that could hamper the pace of its capital recycling activities.
As at 1.16pm, shares in CLI were trading 4 cents or 1.25% up at $3.25.
