City Developments (CIT SP) - Maybank Kim Eng 2016-11-10: Value Emerging

City Developments (CIT SP) - Maybank Kim Eng 2016-11-10: Value Emerging CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - Value Emerging


Limited catalysts, but value emerging

  • 3Q16 inline. Although 9M16 made up just 50%/54% of our full year sales/profits, we expect a strong 4Q performance to make up the difference. 
  • We note that CNY3.2b of pre-sold homes in China and the recently concluded deal on Nouvel 18 have yet to be recognised. This will provide earnings visibility from 4Q16. 
  • Maintain HOLD with unchanged RNAV-based SGD9.42 TP on limited near term catalysts. Nonetheless, we see value emerging with the recent share price correction.


3Q16 boosted by CES sale; expect stronger 4Q 

  • Headline net profit rose 60% YoY to SGD170m. This was boosted by a oneoff gain of SGD49.5m from the sale of City e-Solutions. Stripping that out, 9M16 revenue/net profit of SGD2.7b/SGD360m made up just 50%/54% our full-year forecast. However, as 4Q16 performance should be strong, we deem its YTD performance as inline. 
  • Notably, we expect significant sales recognition from Hong Leong City Center and the recently concluded deal for Nouvel 18.


Key highlights from post-results meeting 

  • We hosted CityDev at a post results meeting with clients. Management believes the market has not given the stock sufficient credit for its strong recurring income base (51% of assets, 62% of EBITDA) and believes its stock deserves a higher valuation. It sees room for ROE enhancement via improvement in time to market and increasing financial leverage.
  • Interestingly, management observed higher interest in its UK luxury homes after higher stamp duties were implemented in Hong Kong recently. The 30% tax on foreign home buyers in HK is much larger than the 15% in Singapore. Tenant exits at Republic Plaza next year provide opportunities to enhance yields through refurbishments and tenant change.


Market appears to have ignored positives from PPS 3 

  • CDL announced its third PPS deal with Nouvel 18 in late October. With the slight correction in its share price since, we believe the market may have ignored the positives from this deal. 
  • While the expected accretion to its NAV is merely 3 cts, we believe successful navigation of its QC deadline has lifted an important overhang on the stock and unlocked SGD0.8b of cash that can be redeployed for higher returns.


Post-results meeting notes 

  • We hosted management at a post-results meeting with clients. Key highlights:

Enhancing ROE. 

  • Management shared its plans to enhance shareholder returns. Efforts to improve its time to market and better collaboration across business units can help improve its unlevered returns of 4-8% for the development business. 
  • Efficiency drive across its hotel operations should help lift margins above the current 20%. Together with the typical 5-6% ROI for investment properties and higher financial leverage, ROE can be enhanced for shareholders. 
  • Management note that the current low 20% leverage on its balance sheet is not ideal and sees the current low interest rate environment as a good time to increase leverage. It will also look to put more capital to work in the five key target markets (SG, CN, UK, JP, Aust).

Results. 

  • Results for the quarter were boosted by gains from the sale of its stake in City e-Solutions. It has recognised 29 of the 38 units sold at Gramercy Park and will book the rest after documentation is finalised. It expects to book profits from its pre-sold homes in China from 4Q16. 
  • We note that presales at Hong Leong City Centre in Suzhou and Hongqiao Royal Lake in Shanghai have already reached CNY3.2b (or SGD0.6b). Rental income would have marginally risen if income loss from office assets sold in PPS2 were excluded. Weakness in its hotel operations should persist into 4Q16.

PPS 3. 

  • It managed to achieve gains of SGD64m from PPS 3. This comprises SGD26m in profits and SGD38m in QC payments that have been avoided.
  • Management reiterated that there are no put/call options from all three PPS deals.

Recent increase in HK stamp duty makes other markets look attractive.

  • Management commented that the recent increase in stamp duty for home purchases in Hong Kong has made other markets look attractive. It has already seen higher demand for luxury homes in the UK. 
  • Singapore’s 15% tax on foreign home buyers is low compared to Hong Kong’s 30% and unlike HK, home prices in Singapore has not spiked in recent years.

Opportunities from tenant exits from Republic Plaza. 

  • While the exit of three key tenants from Republic Plaza next year could lead to higher vacancies, CityDev sees opportunities to enhance rental yields with refurbishments and tenant change. 
  • We note that these tenants occupy around 20% of the building. Using the exit of Metro from City Square mall last year as an example, management achieved significant uplift to rents after replacing the vacated space with smaller tenants.


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/ 2016-11-10
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 9.420 Same 9.420




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