CapitaLand Investment - UOB Kay Hian 2022-02-28: 2021 A Strong Set Of Numbers For Its Maiden Results

CAPITALAND INVESTMENT LIMITED (SGX:9CI)

CapitaLand Investment - 2021 A Strong Set Of Numbers For Its Maiden Results

There was much to admire in CapitaLand Investment’s 2021 results: PATMI of $1.3b vs a loss in 2020, material divestments of S$13.6b, the S$0.15 dividend, continued decline in gearing to 0.48x as at end-21 and fund management EBITDA margin remaining well above 50%.
Going forward, we expect CapitaLand Investment to continue to witness strong growth in its funds under management as well as fee income-related businesses.
Importantly, we expect lodging to drive earnings growth in the near term.

CapitaLand Investment (SGX:9CI) reported 2021 revenue of S$2.3b (+16% y-o-y) and core PATMI of S$497m (+12% y-o-y) were slightly ahead of our expectations. The strong numbers were the result of a broad based recovery in CapitaLand Investment’s assets with higher contributions from both its fee-income related business (FRB) as well as its real estate investment business (REIB). Including portfolio and revaluation gains, the company’s PATMI swung from a loss in 2020 to a profit of S$1.3b.
Better-than-expected dividends. CapitaLand Investment declared a total dividend of S$0.15/share comprising S$0.12 ordinary dividend and S$0.03 special dividend, implying a 57% payout ratio. During the results briefing, CapitaLand Investment stated its belief that it will be able to generate a healthy core PATMI to pay a S$0.13 dividend for at least the next two years.

While this business continued to experience difficult operating conditions in 2021, CapitaLand Investment nevertheless still progressed the build-out of its long-stay business as well as the moving into adjacent segments such as purpose build student accommodation (72% of its lodging investment in 2021 was in this segment).
Over the course of the next 12-18 months, we should see the return of international travel which should then allow margin expansion in CapitaLand Investment’s lodging assets as well as higher ROE.
During the analyst call, CapitaLand Investment's management stated that this business could generate about S$150m in EBITDA vs our current 2022 and 2023 estimate of S$48m and S$78m respectively.

With seven new funds incepted in 2021 (totalling S$1.4b in external capital), CapitaLand Investment's management stated that it had received very encouraging support for its private funds and thus is seeing more investor interest. In particular, it highlighted a special situations fund in China, a China data centre fund (as well as other data centre strategies in Asia), credit strategy in commercial and residential spaces in China and possibly Australia, as well as renewable energy and energy transition funds.

A sustainable double-digit ROE is within CapitaLand Investment’s medium-to long-term reach in our view. In the near to medium term, CapitaLand Investment will need to continue to use its balance sheet to seed its private equity funds; given that it does not have a track record, it will need to inject more equity and thus an ROE in the +15% range will necessarily take longer.
Thus, in the short term, more capital will be needed for the private equity business given its small size of S$26b while on the public funds businesses, CapitaLand Investment is arguably overcapitalised; thus it will look to rebalance over time.

CapitaLand Investment divested S$13.6b worth of assets in 2021 (2020: S$3.04b). However management cautioned that this will not be repeatable in 2022 as market conditions have changed, and highlighted that its annual capital recycling target remains at S$3b.
In 2021, CapitaLand Investment sold out its assets at a very opportune time with average divestment premium above carrying value of 13% vs 8-10% historically. Note that in 2021, 70% of the divestment value was related to integrated developments while 56% of CapitaLand Investment’s total invested value of S$6.8b was in new economy assets.

We have upgraded our 2022 and 2023 earnings by 5% and 8% respectively to account for a slightly faster recovery in CapitaLand Investment’s lodging segment as well as slightly better margins in its fund management business.
Maintain BUY with higher target price of S$4.13. We value CapitaLand Investment at S$4.13/share (previously S$4.02) using an SOTP-based methodology which comprises of:
- its fee-income platform where CapitaLand Investment earns fees from its investment management, property management and lodging management platforms, and
- its investment properties which CapitaLand Investment accounts for on its own balance sheet, as well as its various stakes in its listed REITs and its various stakes in its unlisted funds.
See
Catalysts:
- Cap rate compression and stronger-than-expected growth in its funds under management.
- Recovery in lodging business from the further reopening of regional and global economies.

Adrian Loh UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-02-28

SGX Stock Analyst Report BUY MAINTAIN BUY 4.13 UP 4.020