City Developments (CIT SP) - UOB Kay Hian 2016-10-24: Securitising Nouvel 18 For A Win-Win Outcome

City Developments (CIT SP) - UOB Kay Hian 2016-10-24: Securitising Nouvel 18 For A Win-Win Outcome CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - Securitising Nouvel 18 For A Win-Win Outcome

  • Securitisation of Nouvel 18 in the third PPS is a win-win outcome for CDL and high net worth investors alike. The deal gives investors a discounted entry to prime Ardmore property and 5% guaranteed return, further subsidising the purchase price. 
  • CDL will avoid hefty extension charges estimated at S$118m and yet retain scope for upside participation through the incentive fees arrangement while collecting some asset management fees. 
  • Maintain BUY with an unchanged target price of S$10.36.



WHAT’S NEW

  • City Developments (CDL) announced its third Profit Participating Security (PPS) transaction valued at S$977.6m targeted at Singapore high net worth investors to unlock value of Nouvel 18.


STOCK IMPACT


Much-anticipated monetisation of Nouvel 18 in line with estimates. 

  • The deal values Nouvel 18 for S$965.4m or S$2,750 psf in line with our built in RNAV estimates. The much-awaited transaction comes after CDL acquired the remaining 50% stake in the 156- unit Nouvel 18 from Wing Tai Holdings in July this year for S$410.96m. 
  • We understand CDL’s carrying cost for the project to be S$2700 psf, which would result in a small gain of S$27m. CDL plans to recycle the capital raised for growth plans.

Fixed payout of 5% p.a. for five years in addition to participation in asset divestment. 

  • A S102m PPS vehicle has been set up, with 14 high net worth individuals, with the investment sizes averaging S$7m-8m, according to The Straits Times. 
  • DBS Bank and UOB will concurrently provide S579.2m in senior loan facilities, and S$296.4m notes (DBS: S$156.4m, CDL: S$140m) will be issued. Investors in the PPS transaction will receive a fixed payout of 5% pa over a period of five years in addition to participation in asset divestment. 
  • No SSD or ABSD applies as this is a share recapitalisation transaction.

CDL will be the exclusive asset manager and marketing agent 

  • CDL will be the exclusive asset manager and marketing agent (for five years with an option to extend to seven) to manage, lease, market and sell the units of Nouvel 18. CDL will receive an incentive fee after a performance benchmark is met. 
  • The benchmark setting takes into account funds to repay debt and deliver the annual 5% internal rate of return on the PPS. After the benchmark is fulfilled, a portion of any excess will be paid as the incentive fee and the remainder will be distributed. 
  • The breakeven psf will come out S$2,900 psf after taking into account the present value of the 5% returns. 

De-risking as extension charges threaten. 

  • Management opted to structure the deal now to balance the trade-off between avoiding extension charges vs future price appreciation potential. The extension charges have been estimated at S$118m (worst case S$228m: first year S$38m, second year S$76m, third year S$114m). Should there remain any unsold units beyond seven years, the equity risk will be borne by the new investors.

A win-win situation. 

  • From the perspective of high net worth investors, the price is at a discount to the recent market transactions and the yield at 5% for five years will further subsidise the purchase price. 
  • From CDL’s perspective, it allows them to avoid hefty extension charges and yet retain scope for upside participation through the incentive fees arrangement while collecting some asset management fees.

Financial effect. 

  • NTA per share would rise from S$9.86 to S$9.89 and EPS would rise from 83.6 S cents to 85.6 S cents. Net gearing is expected to improve from 27% to 19%.


EARNINGS REVISION/RISK

  • We retain our earnings estimates

VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$10.36, pegged at a 20% discount to our RNAV of S$12.95/share.


SHARE PRICE CATALYST

  • Relaxation of property measures in Singapore and substantial overseas acquisitions.




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-24
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.36 Same 10.360



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