City Developments (CIT SP) - Maybank Kim Eng 2016-10-21: PPS 3 for Nouvel 18

City Developments (CIT SP) - Maybank Kim Eng 2016-10-21: PPS 3 for Nouvel 18 CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - PPS 3 for Nouvel 18


Maintain HOLD; Key stock overhang lifted 

  • There was little surprise in CityDev’s announcement of its third PPS or profit participation securities. While the scheme’s ASP of SGD2,750 psf beat our SGD2,500 psf assumption, a mere 3cts uplift for its pro-forma NTA suggests our cost estimates may have been too low. 
  • We drop FY16 EPS by 2% and our TP slightly to SGD9.42, still based on a 20% discount to RNAV. 
  • While we believe successful navigation of its QC deadline has removed a near-term overhang, we maintain HOLD on limited stock catalysts. 
  • With SGD0.8b of cash unlocked, we believe the market will now focus on its capital deployment. 
  • We prefer CapitaLand (BUY, TP SGD3.93) for sector exposure.


Successful navigation of QC deadline for Nouvel 18 

  • CityDev has launched PPS 3, its third PPS platform, for Nouvel 18, a luxury condominium in the Ardmore area. This project faces its first Qualifying Certificate (QC) deadline in Nov 2016 and is liable for penalties of SGD38m/76m/115m over the next 1/2/3 years if it remains unsold. 
  • Clever structuring of the PPS has allowed it to offload the project to a group of Singaporean investors and avoid penalties. The property is valued at SGD965.4m or SGD2,750 psf in this deal.


Caps downside, with potential upside… 

  • The deal structure has capped CityDev’s maximum exposure to this project at SGD140m, which is its capital contribution via a 7-year note.
  • However, if the homes are eventually sold at higher prices, it will retain an undisclosed share of the upside after its PPS investors receive their preferred return of 5%.


…but how will it re–deploy the unlocked capital? 

  • Subtracting professional fees, working capital retained by the holding company and its capital contribution of SGD140m, we estimate that CityDev will receive net proceeds of SGD0.8b. 
  • Its net gearing should dip from 0.28x to just 0.10x by end-2016, while its cash hoard should climb above SGD5b. 
  • With this large cash build-up, we believe the market will await its capital deployment to assess its outlook.



Swing Factors


Upside

  • Monetisation of investment assets conservatively held at cost.
  • Renewed interest in Singapore’s high-end residential market.
  • Strong rebound in home sales.

Downside

  • Sharp fall in home prices, necessitating impairment charges.
  • Poor execution of overseas projects. Recent ventures into China, the UK and Japan have raised risk profile.
  • Sharp increase in interest rates could hit demand for properties and drive down asset prices.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-21
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 9.42 Down 9.430



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