• Deleveraging on track – CAPL achieved their 2019 divestment target of S$3bn, which is aimed at helping the group lower post-ASB acquisition gearing of 0.73x to 0.64x by end-2020
• Value-driven business model – investment decisions guided by their Business Strategy of Scale, Focus, Balance, Agility
• Target to achieve double-digit return on equity across cycles via three growth engines

We attended CapitaLand’s Investor Day on 29 November 2019 where the group’s management shared the strategy for growth, echoed their value-driven investment evaluation process and addressed some of the questions from investors and analyst. The key takeaways from CapitaLand Investor Day 2019 are:

1. Deleveraging on track – CAPL achieved their 2019 divestment target of S$3bn, which is aimed at helping the group lower post-ASB acquisition gearing of 0.73x to 0.64x by end-2020
2. Value-driven business model – investment decisions guided by their Business Strategy of Scale, Focus, Balance, Agility
3. Target to achieve double-digit return on equity across cycles via three growth engines

1. Deleveraging on track

2019 has been a monumental year for CAPL. We witnessed the merger of CAPL with Ascendas Singbridge (ASB) which was completed in June. The merger brought with it:

1. a new vertical – industrial and business parks
2. deepened CAPL’s presence strategic markets of Singapore, China and India – a market which ASB has more operational expertise than CAPL, as well as
3. ASB’s fund management platform

CAPL achieved their 2019 divestment target of S$3bn, which is aimed at helping the group lower post-ASB acquisition gearing of 0.73x to 0.64x by end-2020. CAPL divested S$5.9bn in non-core assets, S$3.8bn of which were to their REITs and funds, bringing the total effective divestments to S$4.9bn as at 21 November 2019.

2. Value-driven business model – investment decisions guided by their Business Strategy of Scale, Focus, Balance, Agility

Scale, focus, balance and agility are the four key pillars underpinning their strategy.

Questions regarding how CAPL will deploy capital and evaluate investments in new markets were answered with the same underlying message: CAPL will focus on value creation, play to their strategic advantages, while considering the risk-return profile and maintaining agility.

CAPL will deploy capital in areas where they have presence in, or when considering investments in new territories or verticals (eg: data centres), they will do so only if they can achieve a meaningful scale for relevance and influence. The key geographies of focus for the respective business segments (development, fund management and lodging) have been identified, and they will seek to utilise their strategic advantage to create and unlock value.

With sustainability, stability and risk management as key considerations, CAPL will maintain the 50-50 spilt between Developed and Emerging Markets when allocating capital. Lowering gearing from the current 0.69x to 0.64x is one of the key targets as this would afford CAPL the flexibility and agility to seize opportunities.

3. Target to achieve double-digit return on equity across cycles via three growth engines

Traditionally thought of a real estate developer and manager, CapitaLand has grown other segments of the business such that the development portion only accounts for <20% of EBIT. >80% of EBIT is derived from recurring rental income from Investment Properties, providing greater income stability and visibility across cycles.

3 Growth Engines:

1. Development: Core Markets Play (Singapore, China, Vietnam, and India)
2. Fund Management: Global – To increase AUM from S$71.7bn to S$100bn by 2024 across REITs and private funds
3. Lodging: Global – To increase the number of keys under management from 112,400 keys as at end-September 2019 to 160,000 keys by 2023.

I. Development: Core Markets Play

CAPL’s development business will be focused in the four key markets where they have an established track record and see growth potential – Singapore, China, Vietnam and India. The group has more the 25 years of operational track record in these territories.

Key competitive advantages and strengths by market:

Singapore: Growth and redevelopment opportunities within existing portfolio

China: Business Park, Industrial and Logistics portfolio added by ASB further differentiates CapitaLand China from peers.

Vietnam: First mover advantage in a developing country with favourable macroeconomic characteristics (strong GDP growth, ongoing urbanisation, growth in educated upper and middle-income groups, township and commercial development opportunities)

India: Riding on the global digitalisation trend through the world’s largest IT sourcing destination

II & III. Fund Management and Lodging Platform to provide recurring fee income

The fund management platform and CAPL’s Lodging Platform are the two engines driving recurring fee income and are essential to achieving the 10% ROE target. CAPL earns fees from the management of the asset in the various REITs and private funds, as well as management contract fees from management of service residences franchised under the Ascott, Citadines, Somerset and Lyf brands.

Maintain BUY with unchanged TP of S$4.20.

Our target price translates to a FY19e P/NAV ratio of 0.75x.

Source: Phillip Capital Research - 2 Dec 2019