The curtain has come down on one of the most storied names on the Singapore bourse.
CapitaLand Limited, a blue-chip real estate giant that was a component of the Straits Times Index (SGX: ^STI), announced a major restructuring back in March.
The company’s development arm would be privatised and owned by Temasek Holdings, an investment firm that has chalked up an impressive 8% annual return over the last two decades.
At the same time, CapitaLand’s investment arm has been spun off as a separate listed entity called CapitaLand Investment (SGX: 9CI), or CLI.
CLI is a real estate investment manager (REIM) with S$119 billion of assets under management (AUM) and around S$83 billion of funds under management (FUM) as of 30 June 2021.
CLI started trading on 20 September and closed the day at S$2.95.
In just five days, its shares had jumped 20% to close at S$3.53 yesterday.
For investors on the sidelines, is it too late to jump on the bandwagon?
A premium to NAV
CapitaLand Group has persistently traded at a discount to its net asset value (NAV).
As such, the rationale for the spin-off back in March was to help unlock value for shareholders.
The discount was partly due to the nature of the real estate industry, where revenue and cash flows were “lumpy” due to the construction, development and subsequent sale of properties.
When CLI was spun out, its NAV was computed at S$2.823 per share as of 31 December 2020.
Management’s rationale was that REIMs are valued differently in public markets from developers, and that listed REIMs normally traded at a substantial premium to their NAV.
A cross-section of REIMs was found to trade at 2.9 times their NAV and around 21.8 times their earnings, significantly higher than the 0.9 times and 15.4 times that CapitaLand traded at, respectively.
This premium may explain the jump in CLI’s share price upon its debut on the local exchange.
A “lighter” asset model
CLI, as a REIM, possesses a business model that promises to be asset light compared to its previous incarnation.
CapitaLand’s revenue was lumpy, but investors should note that it was the group’s development arm that led to an uneven topline.
With the development division out of the way, CLI should enjoy more consistent income flowing from both its AUM and FUM.
Fee-generation AUM provides a recurring source of income and is scalable.
CLI also intends to build up its lodging platform to scale the number of units from the current 123,000 to 160,000 by 2023 by leveraging strong brands such as Ascott, Citadines and Somerset.
On the FUM front, CLI intends to grow it to S$100 billion by 2024 through a combination of strategic acquisitions and organic growth.
Galvanised for growth
In line with CLI’s listing, the group has also beefed up its management team by introducing two new hires — Simon Treacy and Patrick Boocock.
These two men are veterans that hail from reputable global asset managers BlackRock (NYSE: BLK) and Brookfield Asset Management (TSE: BAM.A) and have been recruited to build up CLI’s private equity and unlisted funds portfolios.
Senior management is also supported by more than 260 investment and asset management specialists that are experienced in deal sourcing, origination and execution.
Furthermore, CapitaLand Group has granted the right-of-first-refusal (ROFR) for S$7.6 billion of assets from CapitaLand Development.
This ROFR represents a great opportunity for CLI to tap on in the coming months and years that can be converted into FUM.
CLI and CapitaLand Development can also work hand in hand to leverage capabilities across both entities without CLI being burdened by the lumpiness of the development arm.
The group has set clear goals and objectives for growth and has also the commitment of the management team to execute to deliver, putting CLI on a roadmap for further growth in the years ahead.
Get Smart: Unleashing the Kraken
Just as Hades unleashed the awesome power of the Kraken in the movie “Clash of the Titans”, CapitaLand’s restructuring may also have unshackled a powerful entity in the form of CLI.
CapitaLand Group was a behemoth in its own right, but CLI has now been “reborn” as a new, nimbler version.
It’s still early days for CLI as it readies itself for growth as a new asset-light business.
And investors who are looking for an exciting journey may want to participate in it right from the start.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
