City Developments - DBS Research 2015-12-16: Hitting the right notes

CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Hitting the right notes

Seeding a new investment platform with three office properties worth S$1.1bn
Extracting shareholder value; enables group to recycle capital into other investments with a better exit strategy in the medium term
Immediately accretive to NAV and EPS
BUY maintained , TP S$10.26

City Developments Limited (CDL) announced the formation of a 40%:60% JV with Alpha Investment Partners Limited (Alpha).
The investment platform will acquire a portfolio of three prime office properties worth S$1.1bn. The properties – Central Mall office tower, 7&9 Tampines Grande and Manulife Centre will be seeded by CDL. The JV will invest via a Profit Participation Securities (PPS) structure, which will pay a coupon of 5% to the JV for 5 years, thereafter realising the capital appreciation potential of the portfolio in the medium term.

We see multiple benefits for CDL :
1. enables the group to tap third party capital to extract shareholder value on its balance sheet, enabling CDL to recycle its capital to other investments, potentially to recently announced deals in the UK;
2. accretive to NAV (+S$0.29, +3%) and FY14 EPS (+S$0.25, +30%);
3. it allows the group to better time its exit (5-year option) and potentially realise a fairer value for the portfolio post the current downturn in the office market.

Trading at a P/BV of 0.7x, CDL offers deep value and this transaction further highlights the group’s conservative NAV.
We maintain our BUY call and TP of S$10.26, pegged to a 20% discount to our RNAV of S$12.82.
Supported by a strong balance sheet and diversified earnings base, CDL should be able to weather the current uncertain market conditions well.
We have not priced in this transaction pending its completion.

Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2015-12-09

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 10.26 Same 10.26