Property Development & Inventory - CIMB Research 2016-03-07: Mixed performance in 4Q15

CITY DEVELOPMENTS LIMITED C09.SI CAPITALAND LIMITED C31.SI UOL GROUP LIMITED U14.SI

Property Devt & Invt - Mixed performance in 4Q15

Mixed 4Q15 performance for developers, with impairments taken on residential and hotel assets, while investment properties still enjoying revaluation surpluses.
Going into 2016, we expect the slowing momentum in domestic earnings to be offset by overseas contributions, thus allaying overseas execution risk concerns.
Maintain Overweight (attractive RNAV discount). Top picks: City Dev, UOL, CAPL.

Property developers’ 4QCY15 results were generally in line or slightly below our expectations, with mixed core net profit performance due to the timing of residential billings recognition.
The 4Q results also reflected a combination of revaluation gains from investment properties, divestment profits from sale of assets, as well as impairment charges on residential and hotel properties.

The 4Q operating margins of the listed developers were mixed. CAPL registered lower operating margin due to its residential product mix, which included contributions from the higher-volume but lower-yield township projects.
Meanwhile, Ho Bee Land posted higher 4Q operating margin largely due to new rental income from new buildings that were purchased in 2015.

Developers took the opportunity to kitchen sink, with impairments charges taken on selected residential and hotel assets.
UOL and City Dev booked impairment charges of S$40m and S$72m, respectively, on certain hotels.
Most developers also evaluated the unsold portion of their residential projects versus current market values and this resulted in write-downs for certain projects, particularly those with unsold inventory.

Revaluation gains came largely from higher net property income (NPI) from investment properties, while cap rates in Singapore were steady yoy at 3.75-3.85% in 4Q for prime Grade A buildings.
CIT reported strong S$314m divestment profits from partial divestment of its commercial PPS in 4Q.

Looking ahead, with primary sales volumes slowing and progressive billings from ongoing projects closer to completion, developers are likely to face deceleration in domestic earnings momentum in the medium term.
We think that the vacuum will be filled by new contributions from overseas, including CIT’s China and UK projects, which are expected to start contributing later this year.
Overall, we anticipate that developers will continue to show core net profit growth yoy for 2016.

The sector now trades at a 43% discount to RNAV, less than 1 s.d. below the longterm mean and at the bottom of the -1s.d. to average discount trading range.
Our sector top picks (in order of preference) are CIT, UOL and CAPL.
We believe that catalysts could emerge as concerns about execution risks related to overseas projects abate.

CIT’s valuations are attractive at 0.77x FY15 P/BV. Its balance sheet is strong, as net gearing is low at 0.28x at end-Dec 15. A potential near-term catalyst is ramp-up in overseas contributions, which would remove concerns about its overseas execution ability.

UOL has high recurring income, underpinned by rentals, hotels and investment income. This provides a sturdy recurring income base. Stock now trades at 28% discount to target price.

We like CAPL for its ROE-boosting capital recycling activities. The stock trades at a steep 38% discount to its RNAV.

LOCK Mun Yee CIMB Securities | Yeo Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-03-07

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