City Developments - CIMB Research 2015-12-16: Landmark commercial PPS transaction

City Developments - CIMB Research 2015-12-16: Landmark commercial PPS transaction CITY DEVELOPMENTS LIMITED C09.SI 

City Developments - Landmark commercial PPS transaction 

  • CIT and AAMTFII have set up a 40/60 joint office investment platform for purchasing three office properties worth S$1,075.1m. 
  • This exercise will provide a stable upfront return with room for more upside when office market recovers. 
  • This value unlocking move is positive for CIT, sale price is higher than our estimates and adds 3 Scts to our RNAV. 
  • FY15 bottomline to benefit from a one-off S$227m gain from sale, book NTA/share raised by 29 Scts. 
  • Maintain Add with a revised RNAV-based target price of S$10.50. 

■ Second landmark PPS transaction 

  • In its 2nd landmark profit participation securities (PPS) transaction, CIT has entered into an agreement with Alpha Investment Partners (via Alpha Asia Macro Trends Fund II or AAMTFII) to set up a joint investment platform to buy three of CIT’s office assets, Central Mall (office tower), 7 & 9 Tampines Grande and Manulife Centre, for S$1,071.5m. CIT will take a 40% stake in this JV, while AAMTFII will hold the balance 60%. 
  • The JV will have S$750.1m of senior debt facilities and S$333.5m of PPS. 

■ Stable upfront return, potential for more upside gains in longer run 

  • Under the PPS scheme, CIT and AAMTFII will be entitled to a fully secured fixed coupon payout of 5% p.a. for a period of five years. This deal provides AAMTFII with preferred returns to tune of an IRR of 12.6% p.a., following which CIT will receive all cashflows until its capital is fully repaid. The sharing of any further upside will be based on the stakes of AAMTFII (40%) and CIT (60%). 

■ Divestment price above our current estimate 

  • The sale price of S$1,075.1m is slightly higher than our current estimates for the properties and will add another S$0.03 to our RNAV. More importantly, this deal is positive as it enables CIT to monetise its assets at market valuation and to recycle capital into its new growth strategies, including overseas acquisitions and other investments. 
  • In addition, retaining a stake in the vehicle will allow the group to benefit from potential further upside when the office market picks up. 

■ One-off gain expected in FY15 

  • In terms of impact, this transaction, when completed by late Dec 15, will boost CIT’s NTA/share by 29 Scts and realise an estimated cS$227m of net gain. Hence, we lift our FY15 net profit projection by 38% to S$827m to reflect this gain. 

■ Maintain Add 

  • We continue to like CIT’s ability to monetise its assets and to realise its underlying RNAV value. 
  • We maintain our Add rating with a revised target price of S$10.50, premised on a 25% discount to RNAV. At the current price, CIT is trading at a very attractive 0.76x P/BV and 48% below our RNAV. 
  • Potential catalysts include redeploying funds into new and accretive investments as well as a potential special dividend payout.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2015-12-16
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 10.50 Up 10.47