City Developments - Strong boost from China residential
- FY16 net profit fell 16% yoy to S$653m but was still ahead of our expectations.
- One-off gains and higher residential contributions boosted performance.
- FY17 earnings underpinned by China and UK developments.
- Low gearing of 16%; capital deployment remains key catalyst.
- Maintain Add with slightly higher TP of S$10.51.
4Q/FY16 results highlights
- City Developments (CIT) reported 4Q and FY16 net profit of S$243.8m/S$653.2m, -41%/-16% on a high base from exceptional gains from PPS2 in previous periods.
- Nonetheless, FY16 net earnings were still 7% ahead of our estimate thanks to one-off gains of S$149m in FY16 coming from PPS3, sale of Exchange Tower in Thailand and divestment of stake in City eSolutions.
- Stripping out exceptionals, bottomline would have been fairly flat yoy. The group has proposed a final total DPS of 12 Scts, bringing FY16 DPS to 16 Scts.
Residential earnings surged on China
- 4Q residential PBT doubled to S$242.6m with progressive billings from Singapore and maiden contribution from Suzhou Hong Leong City Centre P1 (SHLCC P1) with a handover of 814 units. An estimated 1,038 units in P1 were sold and are expected to be delivered progressively. SHLCC P2 also generated an additional Rmb502m of sales.
- In Singapore, recognition came from Gramercy Park, Jewel @ Buangkok and other JV projects. Maiden billings from Forest Woods (74% sold) are expected from FY17.
Hotel operations dragged by New York and Singapore
- FY16 hotel PBT fell 32% yoy to S$115.7m, despite a smaller 3.8% decline in revenue, due to challenging operating conditions, particularly in New York and Singapore, AEI works at select hotels and pre-opening costs from JW Mariott South Beach. However, 2017 is off to a more positive start with its global REVPAR rising 4.5% in Jan.
- M&C is taking steps to increase revenue and profit across its portfolio, including the ongoing restructuring of its sales team and strategy, and improving e-commerce capability.
Residential to remain key earnings driver
- Residential activities, particularly in overseas projects, are likely to continue to drive earnings. In addition to the completed SHLCC P1, it expects P2 to be completed in 4Q17; while in the UK, the Belgravia and Knightsbridge is scheduled to be completed in 2Q17. We expect progressive sales and recognition of these contributions to underpin earnings.
- In Singapore, plans to launch Gramercy Park P2 and New Futura as well as progressive sales from ongoing projects should add to its bottomline.
Robust balance sheet, deployment of capital is key
- Balance sheet is strong with net gearing of 16%.
- Management expects to continue to deploy capital, particularly in its core overseas markets such as the UK and China. It recently purchased a Shanghai commercial property for Rmb900m as well as took stakes in Distrii, a leading co-working space provider, and mamahome, an online apartment rental platform in China.
- The group is on track to reach its S$5bn AUM target by 2018 to grow its fee income platform.
- We tweak our FY17/18F EPS by -1.5%/10.9% and raise our RNAV to S$14.01. Our target price of S$10.51 is based on a 25% discount to RNAV.
- Deployment of capital into new investments is a key catalyst.
- Downside risks are likely to come from macro volatility, particularly in overseas markets.