I
wrote about CapitaLand’s restructuring awhile back, taking a more qualitative
approach to understand CapitaLand Investment Management’s (“CLIM”) business. This follow up post discusses how I would value CLIM, based on a sum of the parts (“SOTP”)
analysis of its three main revenue sources – 1) Value CLIM’s stake in its REITs
and Private Funds, 2) Value of Investment Properties, and 3) Value of
Investment Management and Property Management Platform.
The
SOTP analysis would give us the implied intrinsic value of CLIM, and if we were
to compare that against the deal on the table now, which includes CICT shares
as well as a cash portion, we can then decide whether it presents a compelling
opportunity.
Capital
Structure of CLIM
Firstly,
based on the restructuring announcement in March, I estimated the level of debt
CLIM is expected to carry. The announcement noted that CLIM would hold c.23.4
billion of assets, while the NAV of CLIM would be 14.7 billion. Working
backwards, we would arrive at a debt level of 8.7 billion, in order to
reconcile the amount of assets and net asset value. Of course, there would be a
certain amount of net working capital (cash, receivables, payables etc), but we
would exclude that for now as this information is unavailable.
Value
of CLIM’s stake in its REITs and Private Funds
As
the investment manager of these public and private funds, CLIM holds sizeable
stakes in these funds, so that they have skin in the game and the interests of
the manager and unitholders are aligned. The value of CLIM’s stakes in the
REITs can be easily calculated based on the latest share prices of these REITs.
For the Private Funds, we would have to use the value provided in March – 7.8
billion, and I adjusted that to reflect the same 1.5% decrease in value as its REITs. Note that post-restructuring, because of the units of CICT
distributed, CLIM would hold 22.9% of CICT.
Value of CLIM’s Investment Properties
The
restructuring involves the transfer of a number of investment properties to
CLIM, which includes both commercial, retail and business park properties, with
the view of eventually injection these assets into the REITs or selling them
off to third party buyers. The value of these investment properties was stated
to be 10.1 billion in the restructuring announcement. Given that the value of
these properties we as of 31 Dec 2020, I believe an appropriate approximation
would be to look at the price to book rations of comparable public REITs, and
apply that to CLIM’s investment properties.
I
computed the latest P/B ratios of Singapore listed REITs in similar sectors and
arrived at an average P/B ratio of 0.92x. Do note that if we apply this P/B
multiple to CLIM’s investment properties, we would we using a conservative
estimate, as the P/B of the REITs are applied on NAV, whereas we would be
applying the P/B multiple to the asset value of CLIM’s investment properties
(without debt).
Value
of CLIM’s Investment Management & Property Management Platform
CAPL
currently has funds under management (“FUM”) of 79.2 billion as of Mar 2021,
with a 100 billion FUM target by 2024. The acquisition of Ascendas Singbridge
in 2019 provided a substantial boost to FUM. Going forward, CAPL has just
announced its registration as a PE fund manager in China, which would allow it
to further grow its FUM in China.
Valuing
this business segment is probably the most subjective, yet it is the most
lucrative segment of CLIM. In fact, one of the key reasons for the
restructuring process was because CAPL’s management believes that the market
does not realise the true value of the Investment Management platform, which is
asset light, highly scalable and delivers a predictable stream of income.
Currently, CAPL reports income from its fund management and property
management/service residence platform separately, but going forward, CLIM would
consolidate these figures for reporting, as “Total Fee Income”. The fund
management platform has an average EBITDA margin of c.56% from 2017 to 2020,
which indicates strong profitability and even rivals that of top tech
companies. Given that there would be little depreciation and amortization for
an asset light business segment, I estimated that the net profit margin for the
investment management platform (Fund Management, Property Management and
Serviced Residence) would be 25%.
The
“Total Fee Income” figures reported by CAPL is computed by including fee income
from consolidated REITs before elimination at group level, which I understand
it to be the total fee income that REIT unitholders pay on a 100% basis. However,
CAPL’s proportionate stake would have to be eliminated at group level; for
example, if CAPL owns 30% of the REITs’ units, then the “actual” total fee
income would only be 70% of the reported “Total Fee Income” as 30% of that is a
related party transaction.
Using
the “Total Fee Income” reported in the 1Q 2021 Business Update, CAPL earned
Total Fee Income of 186.7 million and 203.6 million for 1Q ’20 and 1Q 21
respectively. On a run rate basis, Total Fee Income for FY21 would then be 814
million. Given that CAPL’s average stake in its REITs is 28.5%, the net amount of
“Total Fee Income” would be 582.3 million. Using the 25% net profit margin
mentioned above, the Investment Management segment would generate a net profit
of 145.6 million. The restructuring announcement noted that comparable Real
Estate Investment Managers trade at an average forward P/E multiple of 19.4x,
thus I applied a 20x P/E multiple to value CLIM’s investment management platform.
SOTP Valuation
Based
on the individual valuations of the three business segments, I computed the
SOTP valuation of CLIM, using both CAPL’s current share capital as well as the
fully diluted share capital:
I
then computed CAPL’s implied share price, which includes the distribution of
CICT shares and the cash consideration:
Risks
This
valuation of CAPL assumes that the restructuring would be approved by
shareholders, and also that the scheme conditions are not breached - for example, the Material Adverse Change clause that I have written about.
Conclusion
Based on the SOTP valuation of CLIM, we arrive at an implied target price of $4.46 (current share capital) and $4.31 (fully diluted share capital) for CAPL, indicating an upside of 21% and 17% respectively from the closing price of $3.68 on 25 Jun 21.
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Disclaimer: This article is intended for informational and discussion purposes only, and do not constitute financial advice. When in doubt, please contact a licensed financial adviser.
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