CapitaLand Investment’s (CLI) “solid” 1QFY2022 ended March revenue growth of 23% y-o-y signals positive trends, but analysts advise a prudent approach to the stock.
UOB Kay Hian’s Adrian Loh is maintaining his “buy” call and target price of $4.13, while OCBC Investment Research has a “hold” call on CLI, with a fair value estimate of $4.13.
UOBKH’s Loh says the company’s 1QFY2022 was a “solid quarter with segmental revenues that were in line with our estimates.”
CLI’s fee income-related business saw revenue increasing by 17% y-o-y to $262 million (or 27% of UOBKH’s full-year estimates) while its real estate investment business generated revenue of $403 million, up 28% y-o-y (or 25% of full-year estimates).
He notes that CLI continues to bring more units under its management, with a 9% y-o-y increase in the number of units in its portfolio to 135,000 as of end-1QFY2022. This means the company is well on track to hit its 2023 target of 160,000 units.
Most importantly, Loh says the overall travel environment has improved as many countries regionally and globally have relaxed travel restrictions as Covid-19 infections have waned.
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This resulted in CLI witnessing a 34% y-o-y increase in revenue per available unit (RevPAU) to $71 in 1QFY2022.
This was led by Europe (+167% y-o-y) and Singapore (+40% y-o-y) with only China stagnating, but pent-up demand for travel to Japan could bolster earnings in this segment in 2HFY2022.
The other key highlight of the quarter was the better-than-expected fund fee rate of 51 basis points (bps) which is ahead of his full-year forecast of 48bps.
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Loh noted that the company continued to guide for a fund fee rate of 50 bps, but did acknowledge that it could be higher if it can successfully deploy new funds under management into new products, as well as sustain its capital recycling rate for the rest of this year.
China also was brought up in the analyst call, with Loh saying the key topic being CLI’s ability and desire to continue to look for opportunities in that country.
He thinks that as CLI is a registered private equity fund manager in China with RMB-denominated funds, it believes it is in a prime position to take advantage of the onshore capital appetite as risk-off sentiment prevails in the West.
He writes that “Interestingly, the company commented that many more Grade A CBD assets are available for sale in China due to liquidity and other problems that current owners face, and thus it is looking to raise capital for this opportunity set.”
Finally, while inflation is a “hot button topic” he reveals that CLI believes it is largely insulated from inflation, given that it has a broad ability to pass through inflation via its lease structures.
For example, within its Singapore portfolio, higher energy costs can be passed onto its tenants via the fair tenancy framework.
Finally, CLI admitted to being more cautious now compared to 12 months ago on the M&A front, due to a “multitude of risks”, key among them interest rates.
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It stated that it now conducts more in-depth sensitivity analyses with a broader range of interest rates, and observed that many assets for sale are being priced “very finely” and thus it is exercising more caution in deploying capital.
Nevertheless, Loh highlights that CLI remains open to acquiring “if the price is right”, and disclosed that data centres remain a focus given that it is a growth asset class. The company also commented that it is open to privatising public market assets.
Separately, OCBC in a May 13 note writes: “CLI provided a business update for 1QFY2022 which pointed to growth in many areas but an uncertain outlook ahead given the current Covid-19 situation in China. Revenue grew 16% y-o-y to $598 million, driven by both its fee income-related business and real estate investment business.”
For the former, its fund management FRE jumped 28% y-o-y to $132 million. Part of this was underpinned by its Private Funds – Event Driven segment, which saw revenue surging from $7 million in 1QFY2021 to $36 million in 1QFY2022. “Although management mentioned that this performance should not be extrapolated for the rest of FY2022 given that 1QFY2022 had a successful fund exit (CapitaLand Vietnam Commercial Value-Added Fund) with an impressive net internal rate of return (IRR) of 34%, we note that 68% of CLI’s 1QFY2022 fund management FRE was recurring in nature,” they add.
Although CLI’s lodging management business has been impacted by the pandemic, “we have started to see a more meaningful recovery, and CLI’s focus is on management and franchise contracts,” says OCBC.
“CLI has emerged as a more nimble and resilient entity following its strategic restructuring, and we believe it would operate with a more asset-light business model with strong focus on recurring income streams,” it adds.
On inflation concerns, CLI management views real estate as a good inflation hedge, and believes it is fairly well-insulated from inflationary pressures given cost pass-through and potentially higher rents.
CLI’s net gearing ratio remained unchanged q-o-q at 0.48x, but implied interest cost inched down 10bps q-o-q to 2.6%. Says OCBC: “Although the reported interest rate hedge ratio was 59%, if we exclude RMB-denominated debt (loan prime rate trending down) and expected $2 billion of debt repayment with divestment proceeds, CLI’s hedge ratio would be approximately 80%.”
Given that interest rates are on an uptrend, management said it will be more prudent in deploying capital, and has paid more attention to its sensitivity analysis on cap rates and interest rate movements, according to OCBC. “It has announced $1.6 billion of divestments YTD to May 11, which is slightly more than half its annual divestment target of $3 billion.”
As at 12.42pm, shares of CLI were trading at $3.84, with a FY2022 P/NAV ratio of 1.2 and dividend yield of 3.2%.
