CapitaLand Investment Limited Issued a Profit Warning: Should Investors Be Worried?

CapitaLand Investment Limited (SGX: 9CI), or CLI, is having a rough time this year.

Shares of the blue-chip property giant have slid 15.5% year-to-date to S$3.10.

Last week, CLI issued a profit warning for its financial results for the fiscal year ending 31 December 2023.

A mix of macroeconomic headwinds, coupled with high interest rates and geopolitical tensions, was to blame.

Should investors feel worried about this announcement and how will things pan out for the property giant?

Fair value losses

Based on a preliminary assessment of CLI’s portfolio of investment properties as of 31 December 2023, the group expects fair value losses to be incurred.

These fair value losses involve properties in markets such as China, Australia, Europe, the UK, and the US.

Because of these losses, CLI expects to report a significant decline in total net profit for 2023 compared with the prior year.

Management, however, assures that these losses are non-cash in nature and arose because of the use of higher capitalisation rates and the prevalence of weak market sentiment.

Operating cash flow remains stable and CLI’s core operating profits have not been badly impacted.

Staying the course

Despite this announcement, investors should note that CLI has been diligently growing its business on various fronts.

The group is also more asset-light now compared to its previous incarnation as CapitaLand Limited before its major demerger.

Its third-quarter 2023 (3Q 2023) business update shows the positive developments that management has worked on throughout this year.

Its fee-income related business (FRB) saw a 5.1% year on year increase in revenue for the first nine months of 2023 (9M 2023) to S$799 million.

FRB now makes up 36% of CLI’s total revenue for 9M 2023.

The good news is that core fund management fee-related earnings (FM FRE) also saw a 9% year on year increase to S$272 million for 9M 2023, led by an increase in earnings from listed and private funds.

CLI continued to grow its funds under management (FUM) from S$88 billion in 2022 to S$100 billion as of 30 September 2023.

These numbers show steady progress in achieving its recurring fee income objectives that are unrelated to the decrease in valuations of CLI’s investment properties.

However, CLI did report that capital recycling is slower than in prior years, probably due to the aforementioned macroeconomic concerns.

Despite this, S$1.1 billion of divestments were announced since the start of 3Q 2023.

CLI also secured several feathers in its cap recently.

It launched its inaugural wellness and healthcare-related fund to tap into this fast-growing sector within Southeast Asia.

The fund’s initial close is S$350 million with a target size of S$500 million and the option to upsize it to S$1 billion.

Meanwhile, CLI was also appointed as the new retail operator for Kallang Wave Mall for six years from 1 April 2024 to 31 March 2030, and this appointment is a testament to the group’s excellent retail management skills.

A bright spot in lodging management

Investors should not forget the good news even amid this bad news.

CLI’s lodging management division is poised to do well because of a strong surge in demand for air travel and tourism.

The property group’s Ascott brand is doing well with around 9,500 units signed across 55 properties for 9M 2023.

The total number of lodging units has also risen by 5% year on year to 163,000 units as of 30 September 2023.

Moreover, Ascott has debuted The Crest Collection in Asia with three properties opened between August to October this year.

This debut should further boost the division’s revenue and earnings moving forward.

Furthermore, lodging management’s FRE has also surged by 31% year on year for 9M 2023 to S$249 million, edging closer to CLI’s 2028 target of S$500 million.

Revenue per available unit (RevPAR) also jumped 25% year on year to S$89 for the same period.

With the projected recovery of tourism to pre-pandemic levels by next year, CLI’s lodging management division should see continued improvements in both revenue and earnings.

Get Smart: Slow and steady wins the race

With the profit warning concerning the decline in valuations, CLI has assured that cash flows will not be adversely impacted.

The property group still generated S$232 million of free cash flow for the first half of 2023.

CLI may be facing several challenges now, but its slow and steady progress should help it to emerge stronger over time.

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Disclosure: Royston Yang does not own shares in any of the companies mentioned.

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