CGS-CIMB Research analyst Lock Mun Yee initiates an “add” rating on Capitaland Investment (CLI) with a target price of $4.59.

Lock forecasts a 16% CAGR in operating Patmi before portfolio gains and revaluations over FY2021 ended December 2021 to FY2024, driven by growth in funds under management (FUM) and fee income, efficient capital deployment, and improved operating performance of its investment and lodging properties as borders reopen.

“We believe this will underpin return of equity (ROE) expansion from operating Patmi from 3-4% between 2017-2020 to around 5% by FY2024 and narrow its current valuation gap as compared to its peers,” Lock adds.

CLI has targeted to expand its FUM to $100 billion by FY2024 from $86 billion as at end-1QFY2022, underpinned by accelerated third-party fundraising and a visible recycling pipeline of S$10 billion worth of directly held investment properties, which are mainly operational, that could serve a pipeline of assets for its fund vehicles over the next two to three years.

CLI and its REITs have recycled $1.6 billion of capital YTD, of which 80% has been retained as FUM, and have acquired $600 million of third-party assets.

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The analyst is confident that CLI can meet its FUM target of $100 billion.

“Whilst some near-term concerns have been raised on CLI’s exposure to China, given the country’s Zero Covid policy and slowing GDP growth, we believe CLI’s long-term positive outlook remains intact, and management continues to be on the lookout for recycling and investment opportunities outside of the Capitaland ecosystem,” she writes.

Furthermore, Lock notes how CLI has a strong balance sheet with gross cash of and undrawn facilities of $8.1 billion at end-1QFY2022 that could be deployed for any distressed opportunities.

The analyst has derived the revised net asset value (RNAV) based on marking to market CLI’s investment properties and its stakes in its private funds; ascribing a value to its fund management and lodging management business; and pegging its stakes in listed REITs to her target price or market price.

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CLI is currently trading at 20.8x 2022 P/E, above the average peer multiple of 18.3x, but its FY2022 P/BV is lower at 1.15x as compared to its peer average of 2.35x.

“We believe this is a function of CLI’s hybrid real estate investment management (REIM) model, with 63% of its gross asset value (GAV) exposed to on-balance sheet investment properties and stakes in its sponsored REITs while its fund management business made up only 23% of its GAV and contributed only 22% to its FY2021 Ebitda,” says Lock.

Overall, the analyst believes that as the group lightens its balance sheet by recycling its assets to realise the value of its properties; improve its capital efficiency by moving towards a more asset light model; and accelerate the growth of its private funds business to boost its fund-fee rate, its ROE and P/BV multiples will rise in the longer run and the valuation and RNAV gap will narrow.

As at 4.13pm, shares in CLI are trading at 1 cent down or 0.26% lower at $3.84 at a FY2022 P/B ratio of 1.15x and dividend yield of 1.68%.

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