City Developments - Acquisitions Beckon In 2017
- We expect City Developments to engage in more acquisitions in 2017 as gearing levels have fallen below 20%, providing healthy headroom for debt.
- It has, once again, demonstrated its ability to monetise assets via a third PPS structure in Oct 2016, building its funds under management to SGD3.5bn.
- Strong sales in its new launches also demonstrate its excellent project management capabilities amid tough market conditions.
- Maintain BUY, with a RNAV-based TP of SGD9.36.
Lightened balance sheet gives ample headroom for acquisitions.
- City Developments’ net gearing may improve substantially to 19% (26% in FY15) post its recent divestments of a high-end project, Nouvel 18, via the profit participation securities (PPS) structures, giving a healthy debt headroom of over SGD3bn (assuming a comfortable gearing level of 50%).
- We expect management to engage in sizeable acquisitions in the near term, capitalising on the current weakness of the market.
Divestment of Nouvel 18 clears high-end inventory overhang.
- The property developer successfully monetised its Nouvel 18 development in October, selling its 100% stake to high net worth Singaporean investors for SGD978m (SGD2,750 psf), and booking a net gain of SGD27m. The move was positive, as it not only cut the risk of its balance sheet shouldering sluggish high-end inventory, but also helped it to avoid about SGD229m in QC charges.
More PPS could be in store for 2017.
- We believe City Developments can do similar PPS structures for its remaining high-end units and, in the longer term, potentially monetise its South Beach project, which has a GDV north of SGD3bn.
- While we acknowledge that there are risks in PPS if the Singapore property market fails to rebound in the 5- to 7-year horizon for PPS structure, this would allow the company to take better stock of the market and time its property sales better.
Expect more overseas project launches in 2017.
- In 2017, we expect it to launch South Beach Residences in Singapore and its overseas projects in the UK, Japan and China depending on market conditions. Its recently-launched (ie October) Forest Woods development saw excellent take-up rates, with 71% sold to date at a ASP of SGD1,400 psf. At Gramercy Park, it sold 38 of 40 launched units at SGD2,600 psf.
- Maintain BUY, with a TP of SGD9.36 pegged at a 30% discount to our rolled-over RNAV of SGD13.37.
- City Developments remains our Top Pick in the developer space, for its asset monetisation ability, nimble capital management and acquisition potential.