Particularly, Lee notes that although CLI is actively looking at deals and M&A, the group is “not pursuing M&A just for growth”. Should the potential deal look un-accretive or not drive return on equity (ROE), he sees that it will be “difficult” to go through.
The analyst sees that CLI did not pay out any special dividend nor undertake share buybacks in the FY2025, as the group is looking at “interesting opportunities in the market” and believes capital deployment will be more accretive.
On the group’s net gearing, Lee notes that CLI is “comfortable” in getting to 90% net gearing, which implies a $6.4 billion debt headroom from the current 43%. He adds that thus far, whenever CLI makes a deal, the group mainly considers using scrip or cash.
He adds: “While it’s also beneficial to use scrip if share price trades above net asset value (NAV), CLI will think about what scrip does to shareholders at the end of the day. Additionally, CLI can sell down its around $8.2 billion stake in listed funds or about $3.9 billion on-balance-sheet assets.”
With regards to the potential spin off of The Ascott Limited (TAL) as a standalone business, Lee writes that although no clear indication was given, CLI indicated that should be TAL’s fee income fully reflected in its share price and no funding is needed for growth, then it could be more beneficial for TAL to have its own currency to do so.
TAL had a FY2025 fee income of $350 million on about 100,000 units, which is expected to grow to $500 million on a pipeline of about 76,000 units with the commencement of operations over the next few years. With this, Lee notes that CLI current earnings before interests, taxes, depreciation and amortisation (ebitda) margin of 23% should improve to 30% with operating leverage.
In China, overall asset valuations fell around 5% in the FY2025, with a larger write-down y-o-y on higher vacancies.
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“It’s hard to say if there’ll be more write-downs ahead given still-weak occupancy and reversions, hence there may still be movements [in the next] 12 months,” writes Lee.
He continues: “On the bright side, CLI expects China divestments to pick up (with hopes to sell $1 billion in FY2026 at book value versus $700 million in the FY2025; may recycle into fee-paying vehicles at discounted valuation), with a three-year rolling target to divest remaining around $3 billion of on-balance-sheet assets in China.”
With the China REIT (C-REIT) market’s removal of its previous reinvestment criteria, this expands the market to all asset classes and faster launch times, Lee sees that this should in turn CLI should be able to accelerate asset divestments.
He notes that CLI has filed for another C-REIT listing and is also exploring private REIT, with the group seeing a lot of opportunities to grow its fund management business in China.
“FY2026 will also be the year when its Chinese renminbi (RMB) denominated funds will surpass US dollar-denominated products,” adds Lee.
With this, the analyst has a “buy” call on CLI at a target price of $3.40. His target price is set at a 20% discount to his revalued net asset value (RNAV) of $4.25, which is “significantly lower” than where CapitaLand traded at pre-restructuring due to a simpler business model post-restructuring.
Key downside risks noted by Lee that could impede the stock from reaching its target price include negative rent reversions, occupancy declines, cap rate expansion within its portfolio of investment properties, slower-than-expected growth in FUM and finally, overpaying for strategic acquisitions.
As at 5.00 pm, shares in CapitaLand Investment are trading two cents higher at $3.08.
