City Developments (CIT SP) - UOB Kay Hian 2017-11-10: 3Q17 Results Below Expectations; Expect More M&As Going Forward


City Developments (CIT SP) - UOB Kay Hian 2017-11-10: 3Q17 Results Below Expectations; Expect More M&As Going Forward CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - 3Q17 Results Below Expectations; Expect More M&As Going Forward

  • City Developments has seen strong take-up at its launches, and management is positive about the Singapore property market which it believes is backed by positive pent-up demand from years of subdued market conditions. 
  • A possible cash offer to privatise M&C is to be made by 8 December. Management is on the lookout for further opportunities globally (especially China, Japan and Australia), while it is seeing slower sales in the UK. 
  • Maintain HOLD with an unchanged target price of S$11.40. Entry price: S$9.70.



RESULTS


Results below expectations. 

  • City Developments (CDL) reported a 3Q17 PATMI of S$156.1m, down 8.3% yoy. Although 3Q17 net profit was boosted by a gain following the divestment of a non-core office building in Osaka, 3Q16 net profit also included a divestment gain from the disposal of the group's 's 52.52% interest in City e-Solutions Limited and the full recognition of revenue and profit of Lush Acres, a fully sold EC.
  • Excluding these one-off gains, the group's net profit would have actually increased by 3.5%. The results came in below our and consensus expectations, with 9M17 PATMI representing 61% of our full-year estimate.

Segmental performance. 

  • 3Q17 property development PBT was down 9.1% yoy, in line with lower revenues and absence of contributions from JV projects, such as Bartley Ridge and Echelon (both completed in 3Q16), partly offset by maiden contributions from Forest Woods and increased profits from Commonwealth Towers. 
  • 3Q17 saw hotel operations PBT grow 33.8% yoy, in line with higher revenues and write-back of impairment loss made on shareholder loans. During the quarter, rental properties PBT increased by 115.8%, due to gains recognised on the disposal of an office building in Osaka but partially offset by exchange losses and lower share of rental contribution from FSGL.


STOCK IMPACT


Singapore residential market backed by strong sales. 

  • For Sep 17, CDL sold 1,056 residential units with transacted value of S$1.8b, more than double the units sold and triple the sales value from the same period last year. During the quarter, profits from Gramercy Park and JV projects (such as Coco Palms, D'Nest, The Venue Residences, Forest Woods, and Commonwealth Towers) were booked. The freehold 174-unit Gramercy Park has been 88% sold. 
  • CDL's other JV projects also achieved steady sales, with the 519-unit Forest Woods Condominium being 90% sold, the 944-unit Coco Palms being over 98% sold, and the 845-unit Commonwealth Towers fully sold. Its JV EC projects, like the 638-unit The Brownstone and the 505-unit The Criterion are also 99% and 90% sold, respectively.
  • Management believes it has the opportunity to unlock value from its existing assets, based on its positive outlook on the Singapore property market, which rides on improved fundamentals and positive pent-up demand from several years of subdued market conditions.

Improved outlook for Singapore offices. 

  • Management noted an increase in office development activity as well as strong participation and competitive bids for the Beach Road commercial site under the Government Land Sales programme. 
  • Rents have also stabilised, with overall CBD rents registering their second consecutive quarter of growth. The group's office occupancy rate was at 92.5% (vs island-wide occupancy of 86.7%).

Possible cash offer to privatise M&C to be made by 8 December. 

  • In Oct 17, CDL announced a possible cash offer to acquire all outstanding M&C shares for 552.5 pence per share. The increased share of M&C’s recurring income will provide for a buffer against volatility and cyclicality of the residential business and open doors to unlock value from M&C assets. 
  • We believe that the offer price is value accretive for CDL, if the deal goes through (further announcement will be made by 8 Dec 17).

Appetite for more M&A deals and investments. 

  • Management alluded that the group will focus on more acquisitions and investments globally going forward, armed with its strong balance sheet. Indeed, the group has been aggressive recently, with its tender for the freehold Amber site for S$906.7m, making this Singapore’s largest freehold collective sale by dollar value. 
  • The group has also been positive on Australia’s luxury retirement sector, where it expanded collaboration with Waterbrook Lifestyle Resorts. Going forward, the group targets to make another S$0.8b in investments and acquisitions by end-18.

Strategic partnership formed with Vanke in China. 

  • Through partial divestment of two properties in Chongqing (70% of Chongqing Huang Huayuan and 50% of Eling Residences) for Rmb986m, the group is entering into a strategic partnership with Vanke.
  • In this partnership, the group will tap on Vanke's local experience and networks in China, while CDL will contribute its international knowledge. According to management, the partial divestment is also in line with their strategy of recycling capital for new acquisitions and investments.

Uncertainty looms in the UK. 

  • The UK’s outlook appears mixed, with concerns over Brexit and political instability adversely affecting the general sentiment on the property sector, especially residential. Despite slowing property sales in London, good quality developments in desired locations are still seeing resilient sales. 
  • While the weak sterling may bring in overseas buyers, increases in Stamp Duty Land Tax but with the BOE's restrictions on mortgage lending curbing investor appetite, uncertainties are breeding a wait-and-see approach. Its 240-unit Teddington Riverside development was soft launched, with sales taking time to gain traction as local buyers prefer buying a finished product. The development is expected to be completed by 4Q19.
  • The 28,000 sf Development House located at 56-64 Leonard Street Shoreditch is fully leased, with vacant possession now expected from 3Q18; the decision on the application for redevelopment is expected to be made in 2Q18.

Looking at further opportunities in Japan. 

  • The group continues to look for investment opportunities in the residential, office and hospitality segments. CDL's JV project, Park Court Aoyama The Tower, is selling well, with it 75% sold ahead of its 1H18 completion.


VALUATION/RECOMMENDATION

  • Maintain HOLD with an unchanged target price of S$11.40 pegged at a 12% discount to our RNAV of S$12.95/share.




Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-10
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 11.400 Same 11.400



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