RHB Research 2015-07-14: CapitaLand - Full Steam Ahead To Achieve Higher ROE. Maintain BUY.

CapitaLand announced a JV with QIA to raise USD600m to invest in serviced residences in the APAC and Europe region. 

  • Maintain BUY and SGD4.20 TP (25% upside). 
  • We are positive on this tie-up as we are confident that the company is able to leverage on its Ascott branding to achieve a higher ROE. 
  • Also, Ascott REIT has a right of first offer upon exit and this helps to provide the REIT with a visible acquisition pipeline.  

Pairing up with a strong strategic partner. 

  • Ascott Limited (CapitaLand’s wholly-owned business unit) has entered into a 50-50 joint venture (JV) with one of the world’s largest sovereign wealth funds, Qatar Investment Authority (QIA), to raise equity of USD600m (approximately SGD809m) to set up a serviced residence fund with an initial focus on the Asia-Pacific (APAC) and Europe regions. 
  • Assuming a range of 50-70% leverage, the asset base for the new fund could vary from USD1.2bn to USD2.0bn (SGD1.6bn to SGD2.7bn). 
  • The fund life is 10 years, with extension subjected to the JV partner’s consent, while the investment period is three years, with two 1-year extensions. 

Why the JV? 

  • CapitaLand is aggressively recycling its capital to achieve a higher ROE of 8-12% (FY14: 7.1%). It has a strong global presence within the serviced residence industry. 
  • Hence, we think it makes sense for the company to leverage on this branding to achieve a higher ROE. 
  • In addition, we think that with QIA as its partner, the fund is able to benefit from QIA’s wide network and deal-sourcing expertise.  

REITs and private funds to complement each other for “One CapitaLand” strategy. 

  • According to the fund’s mandate, it will seek to acquire assets for potential asset enhancement, repositioning or redevelopment. 
  • In our view, the JV fund is able to benefit Ascott REIT (ART SP, NR), as it is granted a first right to manage the fund’s properties as well as a first offer upon exit. 

CapitaLand remains our Top Pick for its large overseas exposure. 

  • We have not factored in the returns from the nascent fund at this juncture. Nonetheless, we like the fact that management is committed to its “One CapitaLand” strategy to deliver a sustainable ROE of 8-12%, via reinvesting capital into higher-yielding projects. 
  • Reiterate BUY, with an unchanged TP of SGD4.20.

(Ong Kian Lin, Ivan Looi)

Source: http://www.rhbgroup.com/