CapitaLand Investment (CLI) 9CI has earned a rating upgrade after posting revenue of $1.345 billion for 1HFY2023 ended June, down 0.7% y-o-y, which was slightly below PhillipCapital Research’s estimates, forming 41% of the research house’s FY2023 forecast.
This was due to a 3.6% decline in contribution from the Real Estate Investment Business (REIB), as there was loss of contribution from properties divested in FY2022, as well as lower contribution from properties in China.
It was partially offset by higher Fee Income-related Business (FRB), which was up 2.4% y-o-y supported by stronger fees from lodging management.
CLI’s 1HFY2023 patmi of $351 million, down 18.9% y-o-y, was below PhillipCapital’s FY2023 estimates at 28% due to lower portfolio gains from asset recycling, higher finance costs and absence of event-driven performance fees from two private funds exited in 1HFY2022.
In an Aug 18 note, PhillipCapital Research analyst Darren Chan upgrades CLI to “buy” from “accumulate”, with a lower target price of $3.68 from $4.12 previously. The new target price represents an upside of 22.9% against its last traded price of $3.09.
Chan lowers his FY2023/FY2024 earnings forecast for CLI by 17% to account for higher finance costs, lower portfolio gains and lower margins from FRB. “We like CLI for its robust recurring fee income stream and asset-light model. [An] immediate catalyst for CLI is a stronger China recovery.”
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The lodging segment is CLI’s star performer. 1HFY2023 lodging management fee-related income grew 35% y-o-y to $159 million due to higher room rates as well as improved occupancy across the portfolio.
Portfolio revenue per available room (RevPAU) grew 32% y-o-y to $87 and was 106% of 1HFY2019 pre-Covid-19 levels.
CLI has a target to reach $500 million in lodging management fees within five years.
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Meanwhile, recurring fund management fees grew 10% y-o-y to $183 million in 1HFY2023.
This alleviates the impact of lower event-driven fees, down 65% y-o-y, in a market that is less conducive for dealmaking, says Chan.
CLI has $1.3 billion in acquisitions from listed and private funds yet to be reported in funds under management (FUM), as well as $8.5 billion in committed but undeployed capital in private funds that could lift fee income if deployed. CLI has a current FUM of $89 billion.
In addition, CLI managed to raise funds in a market battered by high interest rates.
CLI raised $3.2 billion of committed equity for its private funds year-to-date (ytd), compared to $2.5 billion for the whole of FY2022.
It established a new fund, CapitaLand India Growth Fund 2, mandated to invest in Grade A business parks in India. It also raised $986 million of new equity in its CapitaLand China Opportunistic Partners Programme and $150 million in its CapitaLand Open End Real Estate Fund.
That said, CLI’s REIB revenue declined 3.6% y-o-y to $932 million, due to lower contribution from China properties and absence of income contribution from properties divested in 2022.
It is unlikely that CLI will be able to hit its $3 billion divestment target for FY2023 with only $839 million of divestments ytd in this challenging environment, says Chan.
CLI’s lodging management business should continue to remain strong on the back of higher travel demand, he adds. “We also expect event-driven fee-related income to pick up in 2HFY2023, despite the cautious deal-making environment.”
As only 65% of debt is on fixed rate, CLI could continue to be impacted by higher interest rates, says Chan. CLI has a current gearing of 0.57x, up from 0.52x as at end December 2022.
As at 2.52pm, shares in CapitaLand Investment are trading 4 cents lower, or 1.28% down, at $3.08.
