City Developments - DBS Research 2016-05-12: A better tomorrow

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CITY DEVELOPMENTS LIMITED C09.SI 

City Developments - A better tomorrow

• Earnings to be back-end loaded, driven by overseas development project
• Launch of new PPS structure to crystallise value
• Strong recurring earnings base is a big plus in a weak market. 

Attractive valuations. 

• Despite the recent rally in City Developments’ (CDL) share price, we continue to see good value at 0.8x P/NAV. 
• Operating income is improving, and the locked-in sales of its overseas projects in 2H16 should be a re-rating catalyst for the stock. 
• A near term catalyst will be the potential reinclusion to the FTSE EPRA/NAREIT Global Developed Index. 
• Our TP is reduced in S$9.60 (pegged at a 20% discount to RNAV mainly on repricing of its listed subsidiaries) and higher cap rate assumptions across its office portfolio.

Hotel operations offer cashflow stability. 

• Despite hotel operations showing some weakness in FY15, mainly impacted by lower revPAR at its Asian hotels, hotel operations remained as the largest revenue contributor (54%) among all divisions, which implies a substantial proportion of stable income. However, any further weakness in GBP may have an adverse impact on M&C’s contribution to the group.

Some light from overseas investments. 

• CDL’s decision to diversify into the overseas property market amid a challenging outlook in the Singapore property market is finally coming to fruition. 
• CDL expects to recognise approximately S$400m of property sales in FY16F as property projects are completed. 
• Most of the ongoing overseas projects ( China, UK, Australia, Japan, Korea, US) are expected to complete from 2017 onwards. 
• We believe this could offset some impact of a weak Singapore property market.

Valuation:

• We maintain our BUY call and TP of S$9.60, pegged to 20% discount to our revised RNAV of S$12.00. 
• Supported by a strong balance sheet and diversified earnings base, CDL should be able to navigate around the current uncertain market conditions well.

Key Risks to Our View:

• Decline in residential prices in Singapore. As a proxy to Singapore’s residential market, a deteriorating operating environment will cap share price performance.

Derek Tan DBS Vickers | Rachel Lih Rui Tan DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-12

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 9.60 Down 10.26