CapitaLand - UOB Kay Hian 2019-12-02: De-mystifying Asia’s Most Diversified Real Estate Company

CAPITALAND LIMITED (SGX:C31)

CapitaLand - De-mystifying Asia’s Most Diversified Real Estate Company

At CapitaLand Investor Day 2019, management reiterated their growth strategy, from development (four core markets) and fee-income. They also alluded to a 10% ROE target, which is attainable with a scaling up in fund AUM and lodging platforms, ASB integration cost-optimisation, and deployment of S$2.3b debt headroom.
Maintain HOLD with an unchanged target price pegged at a 20% discount to our RNAV of S$4.80/share. See CapitaLand Share Price; CapitaLand Target Price.

We attended the half-day event, where management shared their latest thoughts on CAPITALAND (SGX:C31)’s growth engines, de-leveraging plans, and ROE targets.
Refer to CapitaLand Announcements dated 29-Nov for presentation slides.

Management highlighted that the group’s growth will be driven by development (4 core markets) and fee-income (i.e. globally via fund management and lodging platforms).

For Singapore, management highlighted that growth will largely be driven by taking down older assets, and replacing them with newer buildings at intensified plot densities. Some recent examples include the Liang-Court Redevelopment, Funan (former Funan Digital Mall), Ascott Orchard (former Somerset Grand Cairnhill), CapitaGreen (former Market Street Carpark) and CapitaSpring (former Golden Shoe Carpark).

For China, management noted that its Business/Industrial Parks capabilities (ie which bring jobs and tax income) has provided the company with negotiating muscle with local governments, allowing for replenishment of landbank at attractive prices.
For Vietnam, management believes it is important to secure a first-mover advantage by building landbank (and locking in land prices early). In terms of development, Vietnam lags China by 15-20 years, and the former’s expansion is driven by an expansion of young and educated, upper and middle-income groups.
As for India, management believes the group is one of the few foreign developers with full-integrated capabilities. India (which accounts for 55% of World’s IT professionals) is set to benefit from global digitalisation trends.

CapitaLand is the 9th largest real estate investment manager globally (and top in Asia) with a fund AUM of S$71.7b (up by 32% post-ASB acquisition vs end-2018). A less appreciated advantage of CapitaLand is its stable of REITs, which are vehicles that allow CapitaLand to take out assets from its other 25 private equity funds. Together, the continued growth in fund AUM will help to drive higher recurring fees.

CapitaLand’s lodging comprises returns from both assets and management-fee income. Through vehicles (e.g. Ascott REIT (SGX:A68U) and Ascott Serviced Residence), the assets can generate an excess of 10% ROE.
CapitaLand’s lodging also has an operating platform, which can deliver recurring fee income through third-party management contracts & franchise as a 40-50% margin, and is a highly scalable business.

CapitaLand’s fee income comprises those from the funds (e.g. REITS, business trusts & private equity funds) and lodging. Post-ASB acquisition, 3Q19 fee income has grown to S$150.8m (23% higher vs 3Q18). Although still relatively small, management aims to grow this segment to 10% of CapitaLand’s bottom-line.

As of end- 3Q19, CapitaLand had decreased its net gearing to 0.69x (from 0.73x in 2Q19), putting it on track to reach its target of 0.64x by 2020. Management believes the group has a comfortable gearing range between 0.6-0.7x. At 0.7x, this implies a S$2.3b debt headroom (from 0.64x to 0.70x, based on total equity of S$39b).
Depending on ownership in downstream vehicles, CapitaLand has the means to expand AUM managed for consolidated investments (1x), REIT investments (1.5-5x), and associate/fund investments (4-10x).
The deleveraging has been achieved through gross divestments of S$5.9b (S$2.1b in non-core assets/and S$3.8b into REITs and funds) between 1 Jan to 21 Nov 19. Taking advantage of the low-interest rate environment, the group has also termed out its bonds (eg 10-year bonds) and issued perpetuities.

Given a c.9% 3-year average ROE baseline, the incremental PATMI (c.S$266m) can come from a few channels. Fee income growth can come from an enlarged fund AUM (ie from current S$71.7b to S$100b target in 2024).
Fee income from lodging platform also has potential to grow, potentially scaling up to a targeted 160,000 keys (from the 112,000 keys currently). More fee income is also set to come onstream, when some 50,000 keys (i.e. dormant) of the 112,000 keys start to turn operational.
Management also highlighted that with ASB-integration, there are potential savings coming from cost/process optimisation. Finally, the group can also deploy its S$2.3b debt headroom to drive AUM growth, which will translate into more fees (from fund AUM) and share of income from REIT investments, associates and fund investments.

Adrian Loh UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2019-12-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.800 SAME 3.800