City Developments - Maybank Kim Eng 2015-12-08: Opportunities in Adversity

City Developments - Maybank Kim Eng 2015-12-08: Opportunities in Adversity CITY DEVELOPMENTS LIMITED C09.SI 

City Developments (CIT SP) - Opportunities in Adversity 

Lower TP after revaluing its investment assets 

  • CDL’s 2H15 share-price weakness is arguably caused by a tepid office market. 
  • We cut RNAV to SGD12.22 from SGD12.72 to capture lower investment-property valuations. 
  • This lowers our TP to SGD10.40, still at a 15% discount to RNAV. But CDL trades at a 40% discount, not warranted as it implies stub valuations during GFC. 
  • Bear in mind that any roll-back of cooling measures could revive home sales and CDL has multiple options to monetise held-at-cost assets. 
  • It is now our top sector pick. 

Conservative estimates, building in office weakness 

  • Office assets account for 25% of CDL’s GAV. 
  • We cut our valuation for its investment properties to SGD5.2b from SGD5.7b to incorporate updated office rents and occupancy. 
  • Our new valuation appears very conservative against recent market transactions and builds in normalised cap rates. 

Stub value suggests market over-pessimism 

  • We strip out CDL’s stake in Millennium & Copthorne (MLC LN, Not Rated) to value its non-hotel business. 
  • Implied stub valuation is close to levels reached during GFC. 
  • If we further remove its investment properties, the market appears to be pricing in 32% impairment for the book value of its development assets. This is too pessimistic as it means major cost overruns or that unsold homes are marked to zero. 
  • We estimate that pre-sold homes already provide SGD2.4b revenue visibility over 2016-19E. 

What could drive a re-rating? 

  • We see two potential catalysts which could narrow its RNAV discount: 
    1. A home-sales rebound. Singapore’s property market is, in our view, past the worst of policy tightening and we expect the government to start rolling back cooling measures in the year ahead. This could revive home sales and remove a critical overhang for developer stocks; and 
    2. Monetisation of investment properties. CDL has multiple options to monetise its portfolio of assets, including outright sales. Monetisation could yield material gains on assets held at cost.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-12-07
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 10.40 Down 10.80