• CAPITALAND (SGX:C31) remains our sector Top Pick as we believe the enlarged group is well poised to deliver superior returns across market cycles.
• Key drivers are growing recurring income base from fund management and lodging sector and asset recycling strategy which should drive ROE ahead.
• Valuations are attractive at 0.8x P/BV and a dividend yield of 3.5%. Our Target Price is based on a 20% discount to its RNAV of SGD 5.26/share.

Fund Management AUM to Grow to SGD 100bn by 2024

• Management shared more insights on its fund management business which currently has 8 listed REITs and 25 private equity (PE) funds under its belt, with a total AUM of SGD71.2bn (+32% increase post-merger). Fund management fee (3Q) stood at SGD87m with REITs accounting for ~70% of it. Including lodging, segment fee income (3Q) stood at SGD151m thus amounting to ~SGD600m in stable recurring income pa.
• Overall, we expect the fee income earnings to grow steadily at high single digits over the next 5 years, on the back of AUM growth and steady completion of assets under the lodging segment.

CapitaLand Plans to Achieve Double Digit ROE

• CapitaLand plans to achieve double digit ROE (current 3-year CAGR of 9%) on a sustainable basis moving forward through effective capital deployment/divestments, fund management and fee income growth and cost/process optimisation post-merger. The target returns are higher than its estimated cost of equity of 8%-9%.
• Divestment gains are expected to be one of the core ROE components with management setting an annual target of SGD3bn (FY19 YTD divestments: SGD5.9bn).
• With a gearing target of 0.64x by the end of 2020 (currently 0.69x) divestments are expected to continue to outweigh investments in near-term, with potential options including Jewel Changi Airport stake, US multifamily assets and China shopping malls.

Capital Allocation Strategy

• Capital allocation will be split equally between developed markets (30% for Singapore and 20% for other developed markets) and emerging markets (35% China, 10% India and 5% Vietnam) thus allowing it to build on scale and balance with growth.
• Management emphasised that India will be one of key growth markets in the medium-term with plans to double its commercial footprint to 40m sqf and AUM to SGD7bn in the next five years.

Compensation Aligned to Operational Performance

• Management shared details on its compensation plans which comprise of cash bonus, restricted share plan (pegged to core earnings) and performance share plan (pegged to total shareholder returns). It also noted that from 2020, there will be an additional clawback mechanism added to its compensation plans.

Dividends Sustainable With Room for Growth

• CapitaLand's FY18 dividends of 12 cents are sustainable and guided there is room for growth. Its current dividend policy is to distribute 30%-50% of its cash PATMI as dividends.

Source: RHB Invest Research - 2 Dec 2019