Citi Research analyst Brandon Lee is keeping his “buy” recommendation on CapitaLand Investment (CLI) with a higher target price of $4.68 from $4.67 previously.
The way Lee sees it, China will be a game changer for the group, but there could be an upside surprise from CLI’s REITs.
Thus far, CLI has raised about $2 billion in third-party capital (including $0.8 billion from onshore investors) via five private funds investing in about $5 billion of assets in China, since obtaining the registered status as a Private Equity Fund Manager (PEFM) in China in June 2021.
“We expect the growth momentum in China funds under management (FUM) to continue, helped by ongoing window for distressed assets, as domestic developers continue to deleverage; CLI’s about 30 years of domestic investment and operational expertise; conducive fund-raising environment supported by accommodative monetary policy and onshore investors’ continued hunt for core assets, which will also aid CLI’s asset recycling initiatives (including via China REITs),” says Lee.
He estimates about $15 billion of assets (comprising $10 billion and $5 billion sitting on its private funds and balance sheet, respectively) which it can monetise (to REITs and/or third-parties) or seed new funds.
Meanwhile, REITs contributed 32% to CLI’s total investments in FY2022 ended Dec 31, 2022, which were significantly lower than 68% in FY2021 and 82% in FY2020, and underscored the challenging transactions markets, amid higher cost of capital and negative cap rate spreads.
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“With cost of capital unlikely to compress in FY2023 given further rise in interest rates, we think its REITs could find it tough to make DPU-accretive acquisitions,” says Lee, who also believes that any signs of a Fed pivot could support acquisitions requiring a mix of debt and (pre-emptive) equity, with CapitaLand Ascendas REIT (CLAR) in the best position given low gearing of 36% and 1.2x P/B.
The analyst also is upbeat on recent changes in management appointments, which could lead to more proactive pace of acquisitions via CapitaLand Development’s (CLD) right of first refusal (ROFR) pipeline of income-producing assets. Lee has estimated for the Singapore office assets to be worth about $1.4 billion, industrial assets worth $1.0 billion and the retail assets worth $0.9 billion.
“With group CEO directly overseeing CLI’s listed funds platform, we think this may help accelerate FUM growth momentum and portfolio reconstitution, as well as address share price underperformance,” says Lee.
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At current FY2023 P/E of 13.6 times and FY2024 P/E of 12.9 times, Lee sees valuations as undemanding.
As at 11.55am, shares in CLI are trading at $3.50.
