UOB Kay Hian Research 2015-07-14: CapitaLand - Forging Long-term Strategic Partnerships. Maintain BUY.

Forging Long-term Strategic Partnerships 


  • The 50:50 JV with QIA for the US$600m serviced residence fund could boost fee income annually by about S$7m and provide the financial backing to accelerate Ascott’s growth to meet the target of nearly doubling the apartment units to 80,000 units by 2020. 
  • The group plans to launch 5-6 new funds with total AUM of up to S$8b-10b by 2020. 
  • Maintain BUY with an unchanged target price of S$4.08, pegged at a 20% discount to our RNAV of S$5.11/share. 


WHAT’S NEW 


 US$600m serviced residence fund set up. 

  • CapitaLand announced a 50:50 JV with Qatar Investment Authority (QIA) to set up a US$600m (about S$809m) serviced residence fund with an initial focus on the Asia Pacific and Europe regions. 


STOCK IMPACT 


 Recurring fee income boost. 

  • Management has not announced any seed assets to kickstart the fund. Including debt funding, the fund once fully vested could potentially bring in US$2b assets under management (AUM), a 4.6% increase in its S$43b AUM from 16 real estate private equity funds and five REITs. 
  • This could boost fee income annually by about S$7m (1 S cent accretion to the RNAV of S$5.11) on top of capital gains aimed at achieving the ROE target of 8-12%. 
  • Management expects the serviced residence fund to provide the financial backing needed to accelerate Ascott’s growth to achieve their target of managing 80,000 apartment units globally by 2020 (near to doubling from 41,000 units presently). 

 QIA brings a host of relationships and deal referrals from their extensive network and share CapitaLand’s long-term investment strategy. 

  • The fund will be invested in serviced residences or rental housing properties with an initial focus on the Asia Pacific and Europe regions, for a term of 10 years with an investment period of three years. 
  • It will invest in development, redevelopment and turnkey opportunities, as well as acquire suitable projects for asset enhancement, repositioning or conversion into serviced residences and rental housing properties. 
  • Some of QIA’s properties in the Asia Pacific and Europe regions that could be considered are listed in the table below. 

 Not a means to shift debt off balance sheet. 

  • Management explained that the gearing of the private equity funds will remain healthy at 0.30x-0.35x D/E by the year end. 
  • Management remains comfortable with the group’s gearing level of 0.58x D/E with S$3b in cash and S$2b-3b in credit lines. 

 Serviced Residence segment ideally suited to expand. 

  • Management sees the serviced residence segment as an ideal asset class to penetrate new markets and quickly develop scale as it additionally offers the ability to expand through management contracts apart from standard funds or a REIT management platform. 
  • The franchise model is another available option for serviced residence that management is reviewing. 

 Increased focus on expanding private equity funds. 

  • The group plans to launch five to six new funds with total AUM of up to S$8b-10b by 2020 with 4-5 new potential partners set to come on board. 
  • Management noted that generally around two-thirds of each of their private equity funds tend to be backed by fewer than 10 investors. 
  • Management sees merits in partnering with these and other strategic investors who share common goals over a longer term rather than a blind pot approach in the past where there was a mix of investors with differing time horizons for the goals. 


VALUATION/RECOMMENDATION 


  • Maintain BUY with an unchanged target price of S$4.08, pegged at a 20% discount to our RNAV of S$5.11/share. 
  • The stock is trading at a deep 34% discount to its RNAV


SHARE PRICE CATALYSTS 


  • Improving sentiment in core markets Singapore and China, and 
  • relaxation of property measures.


(Vikrant Pandey, Derek Chang)

Source: http://research.uobkayhian.com/




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