City Developments - RHB Invest 2015-12-16: Second PPS transaction to unlock value

City Developments - RHB Invest 2015-12-16: Second PPS transaction to unlock value CITY DEVELOPMENTS LIMITED C09.SI 

City Developments - Second PPS transaction to unlock value 

  • CDL and Alpha Investment Partners Limited (subsidiary of Keppel Land), through Alpha Asia Macro Trends Fund II, have entered into a Profit Participation Securities (PPS) transaction that will acquire three of CDL’s prime office assets for a total value of approximately SGD1.1bn. 
  • We estimate this will unlock ~SGD580m net from our previous fair value forecast of the three office assets. 
  • We view this transaction positively and raise our TP from SGD8.75 to SGD9.18. 

 SGD1.1bn Private Office Fund 

  • The three prime office assets are Central Mall (Office Tower), 7 & 9 Tampines Grande and Manulife Centre, which are to be injected at SGD218m, SGD336m and SGD487.5m respectively, according to its latest average valuation. Notably, Central Mall and Manulife are freehold and 999-year leasehold properties under CDL, but are sold off as 99-year leases to the joint office investment platform. The transaction is expected to complete no later than 22 Dec 2015. 

 60:40 split to co-finance the portfolio. 

  • Alpha and CDL will co-finance the portfolio in a ratio of 60:40. The total aggregated value of the securities issued in the PPS transaction is SGD333.5 million (Alpha: SGD200.2m, CDL: SGD133.3m). 
  • Concurrently, DBS and OCBC will provide SGD750.1m in senior loan facilities to the joint investment entity, implying a 70:30 debt to equity breakdown to finance the acquisition. 

 Payouts terms. 

  • Investors in the PPS transaction will, in addition to a participation in asset divestment, be entitled to a fully secured fixed coupon payout of 5% interest p.a. for a period of five years, in relation to a component of the PPS transaction involving the subscription of junior fixed rate bonds. 
  • The transaction provides AAMTF II with preferred returns with an internal rate of return of 12.6% p.a. following which CDL will then receive all cash flows until its capital is fully repaid. 
  • Thereafter, further upside sharing will occur between AAMTF II and CDL in the proportion of 40:60 respectively. 

 Market’s immediate reaction likely positive. 

  • The PPS structure presents an opportunity for CDL to unlock value and yet continue to remain a substantial investor in the prime assets comprised in this portfolio of properties. 
  • Reiterate BUY with a higher TP of SGD9.18.

Ivan Looi RHB Invest | Ong Kian Lin RHB Invest | http://www.rhbinvest.com.sg/ 2015-12-16
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.18 Up 8.75