CIMB Research 2015-07-14: CapitaLand - Fund Management Platform Boost. Maintain ADD.

Fund management platform boost 

  • Capitaland’s serviced residence unit, Ascott, has entered into a 50/50 JV with QIA to set up a US$600m global serviced residence fund, thus enabling this SBU to accelerate growth of units under. 
  • Furthermore, Capitaland will expand its fund management business, with plans to set up 5-6 funds by 2020 with total AUM of S$8bn-10bn. 
  • This would enable the group to leverage on its real estate expertise, keep its balance sheet efficient by recycling capital, while expanding fee income. 
  • While the positive earnings impact of the latest JV is likely to be felt in the medium term, these activities should boost its ROE closer to its long-term target of 12%. 
  • Maintain our Add rating with an unchanged target price of S$4.08. 

What Happened 

  • Capitaland’s serviced residence business unit, Ascott, has entered into a 50/50 JV with Qatar Investment Authority (QIA) to set up a US$600m global serviced residence (SR) fund, with potential AUM of up to US$2bn. 
  • The JV will invest in SR properties for development, redevelopment or with asset enhancement opportunities in Asia Pacific and Europe initially. 
  • The JV will have exclusive deal flow rights over investments available to Ascott during the investment period. 
  • The JV term is for 10 years, with an investment period of three years, with potential to extend subject to the JV Board’s consent. 
  • The JV has granted ROFR to ART upon exit. 
  • No asset has been identified by the JV yet. 

What We Think 

  • This JV would enable Ascott to accelerate its growth to double its current room portfolio to reach its 80,000-unit target by 2020. 
  • In addition, Capitaland is also looking to restart the growth of its fund management business with plans to launch 5-6 new funds with total assets under management (AUM) of S$8-10bn by 2020. 
  • This would add to the group’s existing S$43.5bn AUM. 
  • In order to ride on the new trends in real estate fund management, with increasing presence and the needs of large-scale, long-term institutional investors, as well as in tune with its capital management strategy, fund management activities would help the group leverage on its expertise, achieve scale, as well as allow for capital recycling and optimising of its balance sheet and expansion of fee income to enhance ROE. 
  • The group would continue to target an unlevered internal rate of return (IRR) of high single digit in Singapore and 12-17% in overseas markets. 
  • Apart from Singapore and China, the group also intends to explore opportunities in Japan, Korea, Indonesia and Vietnam. 

What You Should Do 

  • The impact of the latest tie-up is expected to be positive for the group and is likely to boost its bottomline in the medium term. 
  • Maintain Add, with an unchanged target price of S$4.08, pegged to a 20% discount to RNAV. 

(LOCK Mun Yee; TAN Xuan, CFA)

Source: http://research.itradecimb.com/