CapitaLand Investment - UOB Kay Hian 2022-08-12: 1H22 Weaker-Than-Expected Results But Outlook Remains Solid

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CAPITALAND INVESTMENT LIMITED (SGX:9CI)

CapitaLand Investment - 1H22 Weaker-Than-Expected Results But Outlook Remains Solid

• CapitaLand Investment reported weaker-than-expected 1H22 results with PATMI declining 38% y-o-y as a result of China’s COVID-19-related restrictions.
• While some of CapitaLand Investment’s near-term growth outlook hinges on China returning to normal, we nevertheless believe that the company’s position remains solid with lodging and private funds management continuing to exhibit strong growth.
• Maintain BUY with a slightly higher target price of S$4.28 (previously S$4.13).

1H22 a weaker-than-expected quarter for CapitaLand Investment (CLI).

• While CapitaLand Investment (SGX:9CI) reported 1H22 revenue that was in line with our estimates, its PATMI of S$433m (-38% y-o-y) was weaker than expected as it formed only 41% of our full-year estimates. This was due to the China malaise:
  1. the country’s COVID-19-related lockdowns delayed CapitaLand Investment’s planned capital recycling deals in 2Q22 (which resulted in a lower level of portfolio gains in 1H22 compared to 1H21), and
  2. higher levels of rental rebates for its retail assets.
• Lodging resurgence. The highlight continues to be lodging, with CapitaLand Investment increasing its units under management by 10% with > 7,500 units signed, as well as the acquisition of the Oakwood Worldwide portfolio which brought in another 15,000 units into its fold. With a total of 153,000 units in its portfolio, CapitaLand Investment is well on track to hit its 2023 target of 160,000 units.
• Importantly, the overall travel environment has continued to improve as many countries regionally and globally have relaxed travel restrictions as COVID-19 infections have waned. This resulted in CapitaLand Investment witnessing a 44% y-o-y increase in revenue per available unit (RevPAU) to S$82 in 1H22 (1H21: $57). This was led by Europe (+228% y-o-y) and Singapore (+54% y-o-y) with only China stagnating (-11% y-o-y).
• Not all doom and gloom in China. While its China retail assets were a drag in 1H22, we highlight that CapitaLand Investment’s business park assets had positive rental reversions. In addition, the company launched its first onshore renminbi fund in 1H22 and will look to launch more of such renminbi funds in the near term.
• CapitaLand Investment also disclosed that large experienced fund managers (e.g. sovereign wealth funds and pension funds) continue to have a reasonably healthy appetite for investing in China via CapitaLand Investment’s private funds, while the smaller funds have largely taken a risk-off mode for China.
• We also note that US funds are currently underweight on China and have evinced interest in increasing exposure in the near to medium term.

Capital recycling – still targeting S$3b for 2022.

• With S$1.6b worth of capital recycling achieved year-to-date, CapitaLand Investment remains optimistic that it can hit its annual target of S$3b for 2022.
• In 2Q22, China was the key drag with zero capital recycled despite having > RMB5b in deals that the company had in the pipeline, but which had to be deferred.

Potential exclusion of CapitaLand Investment from the FTSE EPRA NAREIT Index.

• During the analyst call, CapitaLand Investment's management appeared nonplussed regarding its potential exclusion from the index, principally on the basis that as its fee income-related business grows in the next 12 months, less than 75% of its EBITDA is derived from “relevant real estate activities” (1H22: 73%).
• The potential funds outflow from CapitaLand Investment could be meaningful as it is a constituent of four of the 10 indices with weighting of between 0.35% to 2.03%.

CapitaLand Investment - Earnings forecast revision and recommendation

• We have made some minor changes to our earnings forecasts for CapitaLand Investment with ~4% upgrades for 2022-24. While we have lowered our assumptions for associate earnings, this has been more than offset by a faster recovery in lodging earnings (as well as the inclusion of the Oakwood acquisition), lower interest cost as well as lower administrative costs.
• Maintain BUY recommendation on CapitaLand Investment with a higher SOTP–based target price of S$4.28.
  • The investment and lodging management segments are valued using global EV/EBITDA multiples while the property management segment is valued based on RNAV.
  • CapitaLand Investment’s listed and unlisted funds are valued using a combination of market and/or UOB Kay Hian target prices and carrying value respectively.
• CapitaLand Investment’s 2022F P/E and P/B of 12.2x and 1.2x respectively are inexpensive in our view. While 1H22 presented some challenges, we believe that the company will be in a much stronger shape 6-12 months from now as we expect China’s recovery path to be sustained post 4Q22.
• See
  • CapitaLand Investment's Share Price,
  • CapitaLand Investment's Target Price,
  • CapitaLand Investment's Analyst Reports,
  • CapitaLand Investment's Dividend History,
  • CapitaLand Investment's Announcements,
  • CapitaLand Investment's Latest News.
• Catalysts to CapitaLand Investment's Share Price:
  • Cap rate compression and stronger-than-expected growth in its FUM.
  • Continued recovery in lodging business from the further reopening of regional and global economies.
  • Gradual reopening in China after the recent COVID-19 lockdowns.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-12

SGX Stock Analyst Report BUY MAINTAIN BUY 4.28 UP 4.130