City Developments - UOB Kay Hian 2016-02-26: 4Q15 Firmer Footing In Overseas Markets

City Developments - UOB Kay Hian 2016-02-26: 4Q15: Firmer Footing In Overseas Markets CITY DEVELOPMENTS LIMITED C09.SI 

City Developments (CIT SP) 4Q15: Firmer Footing In Overseas Markets 

  • Results were within expectations; CDL’s diversification strategy was underpinned by the twin pillars of overseas growth and fund management. 
  • Management re-iterated conviction in expanding its overseas footprint, especially in the UK, Japan and China. 
  • Fund management expansion is likely from the forthcoming Profit Participation Securitisation Platforms. 
  • Chairman Kwek postulated the possible unwinding of cooling measures this year, which we think CDL would be a key beneficiary of. 
  • Proposed dividend of 12 S cents per share. 
  • Maintain BUY with an unchanged target price of S$10.86.  


RESULTS 


 Results in line with expectations. 

  • City Developments (CDL) reported 4Q15 net profit of S$410.5m, up 6.6% yoy (285.8% qoq). 
  • CDL’s results were within expectations, accounting for about 103% of our full-year estimates. 
  • Property development PBT was down 53.8% yoy mainly due to Cityview, which was monetised in Dec 14. 
  • Rental property PBT surged 753.4% yoy to S$349m, due to S$314m in gains recognised from Dec 15’s sale of three investment properties via PPS Platform 2. 
  • Net gearing stood at 0.26x in 4Q15 (3Q15: 0.29x). 

 Diversification strategy propped by twin pillars of overseas expansion and fund management, as made apparent during the analysts’ briefing. 

  • Pointing to its overseas exposure which accounts for 27% and 45% of 2015 EBITDA and total assets respectively, management identified China, Japan, the UK, Australia and the US as key markets. 
  • China, in particular, saw stellar growth, with CEO Grant amenable to funnelling additional expansionary funds (initial S$800m earmarked nearly depleted). In 2014, CDL set a lofty target of managing S$5b in funds over the span of five years. Through both PPS platforms, over half that amount (S$2.6b) has been achieved within a short span of two years. 
  • We understand that management will potentially continue its current momentum, with another PPS transaction likely to be forthcoming this year. 

 Not letting up on re-entry into FTSE index. 

  • Management is continuing to lobby for reinclusion, even taking steps to break down its EBITDA segments in its results presentation. 


STOCK IMPACT 


 Overseas activity update. 

  • In China, Tower 1 (462 residential units) of CDL’s Suzhou mixed-use project has seen sales of about 94% (3Q15: 82%), and 27% of 912-unit Tower 3 sold. Handover of both projects is expected in 4Q16. The group’s 85 villas in Shanghai saw 13 units (15%) sold over three months in a typically sluggish sub-sector. 126-unit Eling Residences in Chongqing is set to launch in 2Q16, with expected completion in 2Q17. 
  • In the UK, the S$184.8m acquisition of Teddington Studios was completed in Nov 15, with 213 residential units targeted for launch in 2Q16. Hanover House in Reading has been fully sold, with expected completion in 3Q16. Management re-iterated that they will look selectively at transactions across major UK centres to leverage on its deeper knowledge of the UK market. We note that about S$400m of the S$550m earmarked for UK expansion has been expended. 
  • The Shirokane site in Japan is expected to launch in 4Q17, with the group still in the midst of securing permits. 4Q15 also marked CDL’s reentrance into the Australian market with its 33% stake in a residential project (60% sold), in a partnership with Abacus Capital. Management has stated overseas project IRRs should hit at least 25%. 

 Speculation from management on potential unwinding of cooling measures. 

  • Kwek Leng Beng postulated the possibility of easing property cooling measures this year, likely the additional buyer’s stamp duty. 
  • In our own opinion, correction of 12-15% in overall property prices from the peak could likely trigger the unwinding of property cooling measures. From their respective peaks in 2013, the high-end market, mid-market and mass market have posted declines of 8.9%, 9.8% and 6.7%, with the overall price index extending its slump to 8.4% over nine consecutive quarters from 3Q13’s peak. 
  • CDL as the most liquid residential play on Singapore property would be a key beneficiary of policy easing. We note that management also made provisions of about S$10.4m on selected Singapore projects. 

 South Beach update. 

  • Leasing pre-commitments reached approximately 40% for the retail component of South Beach, while office take-up came to 97% in 4Q15 for 34-storey South Beach North Tower (TOP Feb 15). Tenants have begun to occupy approximately 80% of available space with anchor tenants in the likes of Facebook, Lego and Expedia. 

 Stoic optimism remains, propped up by healthy interest observed at Jun 15’s launch of 638-unit The Brownstone, (55% sold to date). 

  • This in part prompted the launch of 505-unit Criterion (15% sold to date). We note that the group’s other projects are relatively well sold ie, 616-unit Jewel @ Buangkok (92% sold), 944-unit Coco Palms (88% sold) and 845-unit Commonwealth Towers (47% sold). 
  • CDL also successfully bid for the Lorong Lew Lian site (S$710 psf ppr). 
  • Separately, in Kwek Leng Beng’s view, the high-end market should hold up relatively better in comparison to the middle and mass market segment. 

 Damper on hospitality in the US, Europe and Asia, though Australasia provides some cheer… 

  • Global hotel RevPAR declined 4.1% yoy in 4Q15 as lower occupancy (- 3.4ppt yoy) offset a slight uptick in daily rates (0.5% yoy). This was underpinned by lower RevPar performance in New York (11.0% yoy decline), Singapore (decline of 7.6% yoy, London (down 5.0% yoy), as well as the Rest of Asia (4.6% yoy decline). 
  • Management attributed the dismal performance in New York to the ongoing refurbishment of ONE UN New York. Singapore saw weakness from reduced consumer and corporate demand, coupled with increased competition and the stronger Singapore dollar. On a same-store basis, Europe saw RevPar decline 0.5% yoy as Paris hotels saw a 7.4 ppt drop in occupancy following last year’s attacks. 
  • The bright spot in 4Q15 came from Australasia, which registered an encouraging 12.3% yoy increase in RevPar, on the back of higher occupancy and daily rates. 

 …as subsidiary M&C recognised net impairment losses of £43m. 

  • A total impairment of £76m was taken across four assets in New York, Europe, Rest of Asia and New Zealand. Factoring in revaluation gains of £33m, net impairment losses amounted to £43m. 


EARNINGS REVISION/RSK 

  • None 


VALUATION/RECOMMENDATION 

  • Maintain BUY with a target price of S$10.86, pegged at a 20% discount to our RNAV of S$13.57/share. 


SHARE PRICE CATALYST 

  • Relaxation of property measures in Singapore and substantial overseas acquisitions.



Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-26
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.86 Same 10.86


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