City Developments - Maybank Kim Eng 2015-12-16: Monetising Office Assets to Unlock Value

City Developments - Maybank Kim Eng 2015-12-16: Monetising Office Assets to Unlock Value CITY DEVELOPMENTS LIMITED C09.SI 

City Developments (CIT SP) - Monetising Office Assets to Unlock Value 

PPS 2.0: SGD1.1b worth of office assets 

  • CDL has established its second Profit Participation Securities (PPS) with three office assets. 
  • We are positive as this would allow CDL to monetise SGD1.1b worth of office assets, conservatively held at cost. 
  • We expect gains of c.25 SGD cts per share and raise our RNAV by 2% to SGD12.52. 
  • This lifts our TP to SGD10.64, still at a 15% discount to RNAV. 
  • Maintain BUY. 

Retaining 40% for future gains 

  • CDL will hold 40% of the PPS and Alpha Investment Partners, Keppel Land’s fund-management arm, 60%. The partners will contribute SGD133.3m and SGD200.2m respectively and receive fixed coupons of 5% pa for five years. 
  • Including the fixed payout, Alpha will receive preferred returns for an IRR of 12.6% pa. CDL will receive the balance cashflow until its initial capital is repaid. 
  • Subsequent upside will be shared 60:40 by CDL and Alpha. This means that CDL will continue to benefit from future gains after delivering the promised returns to Alpha. 

Aggregate valuation above our estimates 

  • The three office assets in the deal - Central Mall (office tower) (SGD218m), 7 & 9 Tampines Grande (SGD366m) and Manulife Centre (SGD487.5m) - have been valued at SGD1,071.5m. Occupancy is 98% and they will continue to be managed by CDL. 

Raise RNAV to SGD12.52, discount could narrow 

  • We lift our FY15 EPS by 44% to factor in expected gains from this. Proceeds will free up capital for future deployment and lower CDL’s leverage to 0.21x from 0.29x as of Sep 2015. 
  • As the transacted value is 17%/32% higher than our FY15-16 estimates, we lift our RNAV by 2% to SGD12.52. 
  • We believe the stock’s 42% discount to RNAV could narrow from this positive development.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-12-16
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 10.64 Up 10.40