This article was first published in my email newsletter on 27 March 2023. If you like to received my latest thoughts on Singapore stocks, you can subscribe to my email newsletter here.
Imagine this: six different assets filled with high-quality properties. Every year, these assets collect income from these tenants.
Now, here’s what’s even better – these are six assets that you help manage. And in return? You collect a yearly management fee to make sure the properties are in good shape.
You don’t need to fork out capital and own these assets. You don’t own these assets anyway.
But that’s not all.
On the side, you raise money from investors to develop new property projects.
At some point, you sell these assets for a handsome profit.
Enter Singapore’s “Brookfield” blue-chip — CapitaLand Investment
At S$17 billion market cap, CapitaLand Investment is one of Singapore’s sturdy blue-chips.
You see, CapitaLand Investment runs on two profit engines.
First, it runs a fee-based business that collects income from managing property funds, including REITs and hotels. This brings in a highly stable, defensive income stream.
Last year, revenues rose 25% to S$2.8 billion, as a result of a stronger fee income business.
As a long-term investor, this is what I like, because you don’t have to worry much about heavy capital spending.
A fee-income business is “asset-light”.
CapitaLand Investment gets paid for looking after six blue-chip REITs – including Ascendas REIT, Ascott Trust, CapitaLand China Trust, CapitaLand India Trust, CapitaLand Integrated Commercial Trust and CapitaLand Malaysia Trust.
What’s more crucial here is its lodging properties – hotels and hospitality assets rose 23% because of a record year of signings and property openings. That’s not too bad.
But what caught my attention wasn’t its stable fee income business.
The thing is, CapitaLand Investment is a perfect example whose shares trade in cycles.
Put it this way, shares peaked thrice since CapitaLand reorganized itself into CapitaLand Investment back in September 2021 – April 2022, August 2022 and February 2023.
CapitaLand Investment runs on a giant hamster wheel
While its fee-income business produces steady cash flow, the other profit engine – the real estate investment business (REIB) hasn’t done too well.
CapitaLand Investment’s REIB is a cyclical business – it’s a fund business that pulls money from investors, invests and develops property projects. At some point later, sells these assets for a fat profit. Then recycles these money back into new projects again.
Think about the hamster that keeps running on the wheel.
The good thing is, CapitaLand Investment could leverage on other investors’ money to invest in massive project funds and earn a good return on capital for itself. But these projects have long cycles that take time to sell.
Sometimes, you get good profits.
Sometimes, not so good profits.
Last year, CapitaLand Investment’s second profit engine didn’t do too well. That’s why its profit before taxes fell 29% to S$1.38 billion
The fact was, CapitaLand Investment sold off less properties in China, which recorded a much lower property gains.
This was affected by China’s zero COVID policy, the pandemic lockdown and the recent Chinese property debt crash.
Even though CapitaLand Investment still met its divestment target of S$3 billion a year, it was way below a strong year in 2021 when it sold over S$13 billion worth of property assets.
As a result, CapitaLand Investment shares fell 11% in just over a month earlier (see red arrow below)
Will CapitaLand Investment continue to suffer a longer period of weak divestments?
Probably. But this is well supported by its fee-income business.
How to play CapitaLand Investment as an income investor?
There are two ways of looking at CapitaLand Investment.
First, this is a decent dividend payer if you’re looking for a blue-chip that pays income safely. What’s interesting is its steady dividend pay-out.
Before becoming CapitaLand Investment, it used to pay a 9 cents dividends.
What’s more, gearing is well-managed with a total debt to equity ratio of 82%. CapitaLand Investment has $2.6 billion of cash that could easily pay off its S$1.2 billion of short-term loans.
This is a healthy figure for property operators. With a steady cash flow from managing its six REITs and hotels, CapitaLand Investment should be able to manage its gearing well.
In its latest financial results, CapitaLand Investment paid 12 cents dividends, and a special dividend of 0.057 CapitaLand Ascott Trust shares (valued at 5.9 cents).
That’s a total 17.9 cents — a 5% dividend yield.
If I remove its special dividend, CapitaLand Investment long-term dividend yield should trade around 3%.
Not too bad if you want a real safe blue-chip income payer – and don’t want negative surprises in your portfolio.
Second, and I found this more interesting – while we don’t see an immediate impact, but as China’s economy opens up, I expect more investments and growth in the economy.
This should allow CapitaLand Investment to readily deploy and recycle its assets in the 1.5 billion populous country.
Put it this way, CapitaLand Investment has 47% of its property assets in China that can be developed and readily monetized.
This provides plenty of profitable assets to monetize when it decides to divest property projects.
My final thoughts
CapitaLand Investment is a Singapore blue-chip, and owned by Temasek Holdings. Its dividends are well backed by a pipeline of solid assets and fee-income businesses.
Although they have a cyclical real estate investment business, but this is still well-supported by its fee income business.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan