Citi Research analyst Brandon Lee has maintained “buy” on CapitaLand India Trust (CLINT) with a 12-month target price (TP) of $1.50 and an expected dividend yield of 7.5%, citing “relentless” growth momentum.
Lee says CapitaLand India Trust's (CLINT) latest acquisition of International Tech Park Pune-Hinjawadi (ITPP-H) in Pune, India should result in distribution per unit (DPU) accretion of 0% to 0.3% if equity is brought in, but more than 3% on a 100% debt-funded basis.
With volatile equity markets, he estimates that every 1% fall in CLINT’s current share price results in a 0.1 percentage point (ppt) decline in DPU accretion. “Notably, this purchase brings year-to-date (ytd) announced acquisitions to an impressive $2.2 billion, which, coupled with ongoing commitment needs of $600 million for fund-through projects, implies strong requirement for capital over the next few years through FY2025 as the group continues to grow its earnings and assets under management (AUM) base,” says Lee.
He adds that CLINT’s near-term funding needs should be easily fulfilled, given 37% gearing and $167 million of cash. Although CLINT has underperformed compared to S-REITs, Lee says he maintains “buy” on undemanding valuations, with a 0.93x price-to-book value (P/BV) and 7.4 and 8.5% FY2022 and FY2023 yields, solid growth momentum and unique development capability.
Lee’s 12-month TP of $1.50 is derived by averaging dividend discount model (DDM) and revalued net asset value (RNAV) based valuations. His DDM-based valuation of $1.80 is predicated on a cost of capital of 6.9%, at a risk-free rate of 1.95%, beta of 0.98 and long-term growth rate of 1.0%, while the RNAV-based valuation of $1.21 combines its existing portfolio of $1.06, valuing FY2022 net operating income (NOI) on a 7.3% cap rate and future development pipeline of 15 cents.
The analyst points out that ITPP-H is leased to several established IT and IT enabled services (ITES) tenants, including Infosys, Synechron Technologies and Tata Consultancy Services. He believes the acquisition will expand CLINT’s exposure by 2.5x to 3.8 million sq ft in Pune, which is witnessing increased demand for office space as a result of growth in its IT sector.
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“Particularly for ITTP-H, since 1988, Hinjawadi has become one of the more prominent commercial destinations for Pune with the development of Rajiv Infotech Park, and the park’s upcoming phase 4 should further leverage on Pune’s flourishing IT industry,” Lee explains.
He adds that ITPP-H’s acquisition brings CLINT’s FY2022 announced acquisitions to around $2.2 billion, including development projects and completed buildings via previously-entered NCDs and new MOUs, which underlines the group’s solid external growth prospects.
Less positively, Synechron Technologies’ 700,000 sqft lease, which accounts for around 30% of ITPP-H’s net lettable area (NLA), will be expiring between June and August next year, which increases near-term leasing risk, says Lee.
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CLINT’s post-acquisition gearing stands at around 38%, which Lee estimates will rise further to around 40% over the next 6 to 12 months due to funding for ongoing projects. “Given volatile equity markets, the assumption of equity issuance price at close to current market prices of $1.12 and thin accretion to DPU, we estimate every 1% fall in equity issuance price will result in a 0.1 percentage point drop in DPU accretion from the acquisition.”
Key risks to Lee’s investment thesis on CLINT include changes in regulations relating to the repatriation of funds and share buy-back norms and a depreciation of the Indian rupee against the Singapore dollar from current levels, which could adversely impact distribution income.
Higher-than-anticipated supply of commercial and IT space in cities in India, could also lead to absorption challenges for CLINT, while slower-than-expected recovery in the leasing market for the IT and ITES sector would create negative sentiment and impact Lee’s estimates. “If any of these risk factors has a greater downside impact than we anticipate, the share price will likely have difficulty attaining our target price,” he says.
As at 11.33am, units in CLINT were trading 2 cents or 1.78% up at $1.14.
