Brokers' take: Jefferies initiates 'buy' on CapitaLand Investment with S$4 target price

Jefferies on Wednesday (Feb 9) initiated coverage on CapitaLand Investment (CLI) 9CI : 9CI 0%with a "buy" call and target price of S$4, citing its growth of private funds and lodging business, recovery of pandemic-hit sectors and pivot to new economy assets as factors underpinning its future growth.

The target price of S$4 represents an upside of 9.6 per cent from the counter's trading price of S$3.65 as at 4.30pm on Wednesday. At that time, its shares were trading up S$0.11 or 3.11 per cent.

In a research note, Jefferies analyst Krishna Guha highlighted CLI's scalable but capital-efficient business model post-restructuring, with close to 40 per cent of revenue derived from management fees.

He noted that the real estate investment manager has grown its funds under management (FUM) at a compound annual growth rate (CAGR) of 15 per cent from 2017 to 2020, with a stable fee rate of 40 basis points and Ebitda (earnings before interest, tax, depreciation and amortisation) margins of 56 per cent. As at Q3 FY2021, CLI's FUM stands at S$84.3 billion.

"It has a strong network of capital partners diversified across geographies who are repeat investors in various private funds," Guha said. CLI is now Asia's largest real estate investment manager with assets under management (AUM) of about S$120 billion.

CLI's lodging business through its wholly-owned subsidiary, The Ascott Limited, will also be key to its future growth, said the analyst.

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Guha observed that Ascott's lodging units under management have grown at a CAGR of 17 per cent despite the Covid-19 pandemic. As at Q3 FY2021, TAL has 120,000 lodging units under management, of which 56 per cent are operational and the rest in pipeline.

The analyst likes Ascott for its asset-light business model, with fewer than 3 per cent of units under its own balance sheet.

Overall, Guha believes CLI's target of S$100 billion in FUM by 2024 is an "achievable" one, considering its investment portfolio of S$9 billion, sponsor's S$7.5 billion development pipeline and strong deal network.

He pointed out that CLI has been hiring employees from leading private equity firms to grow its private funds business, on top of successfully registering as a private equity fund manager in China last June. This would help it carry out onshore RMB-denominated capital raising and provide fund management services for prospective RMB funds in China.

The analyst is also of the view that CLI will be able to achieve its target of having 160,000 lodging units under management by 2023 "ahead of time", given its track record of growing the lodging platform organically and inorganically.

He noted that CLI is Australasia's largest service residence provider and has a joint venture with Huazhu to grow its presence in the mid-market segment in China. "Despite the growth target, it intends to grow in a capital efficient manner with a stated S$3 billion annual divestment target," Guha said.

Meanwhile, disciplined capital recycling should keep CLI's gearing in check as it works towards its FUM and lodging targets, the analyst said, as he projects net gearing to gradually come down to 50 per cent in 2023.

He estimates CLI's earnings per share to grow at an annual average rate of 19 per cent and the payout ratio to be maintained at 50 per cent.

"Key risks to our call would be (CLI's) inability to achieve growth targets, delayed recovery of commercial and lodging sectors, and higher gearing," Guha said.

READ MORE:

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