Property Development & Inventory - CIMB Research 2016-03-07: Mixed performance in 4Q15

Property Development & Inventory - CIMB Research 2016-03-07: Mixed performance in 4Q15 CITY DEVELOPMENTS LIMITED C09.SI  CAPITALAND LIMITED C31.SI  UOL GROUP LIMITED U14.SI 

Property Devt & Invt - Mixed performance in 4Q15 

  • Mixed 4Q15 performance for developers, with impairments taken on residential and hotel assets, while investment properties still enjoying revaluation surpluses. 
  • Going into 2016, we expect the slowing momentum in domestic earnings to be offset by overseas contributions, thus allaying overseas execution risk concerns. 
  • Maintain Overweight (attractive RNAV discount). Top picks: City Dev, UOL, CAPL. 

4Q15 results largely in line, mixed performance yoy 

  • Property developers’ 4QCY15 results were generally in line or slightly below our expectations, with mixed core net profit performance due to the timing of residential billings recognition. 
  • The 4Q results also reflected a combination of revaluation gains from investment properties, divestment profits from sale of assets, as well as impairment charges on residential and hotel properties. 

Varied operating margin performance 

  • The 4Q operating margins of the listed developers were mixed. CAPL registered lower operating margin due to its residential product mix, which included contributions from the higher-volume but lower-yield township projects. 
  • Meanwhile, Ho Bee Land posted higher 4Q operating margin largely due to new rental income from new buildings that were purchased in 2015. 

Impairments on residential and hotel assets 

  • Developers took the opportunity to kitchen sink, with impairments charges taken on selected residential and hotel assets. 
  • UOL and City Dev booked impairment charges of S$40m and S$72m, respectively, on certain hotels. 
  • Most developers also evaluated the unsold portion of their residential projects versus current market values and this resulted in write-downs for certain projects, particularly those with unsold inventory. 

Cap rates were steady in 4Q, disposal gains provided a boost 

  • Revaluation gains came largely from higher net property income (NPI) from investment properties, while cap rates in Singapore were steady yoy at 3.75-3.85% in 4Q for prime Grade A buildings. 
  • CIT reported strong S$314m divestment profits from partial divestment of its commercial PPS in 4Q. 

Domestic earnings slack taken up by overseas drivers 

  • Looking ahead, with primary sales volumes slowing and progressive billings from ongoing projects closer to completion, developers are likely to face deceleration in domestic earnings momentum in the medium term. 
  • We think that the vacuum will be filled by new contributions from overseas, including CIT’s China and UK projects, which are expected to start contributing later this year. 
  • Overall, we anticipate that developers will continue to show core net profit growth yoy for 2016. 

Valuations inexpensive 

  • The sector now trades at a 43% discount to RNAV, less than 1 s.d. below the longterm mean and at the bottom of the -1s.d. to average discount trading range. 
  • Our sector top picks (in order of preference) are CIT, UOL and CAPL. 
  • We believe that catalysts could emerge as concerns about execution risks related to overseas projects abate. 

Highlighted companies 

City Developments ADD, TP S$10.32, S$7.70 close 

  • CIT’s valuations are attractive at 0.77x FY15 P/BV. Its balance sheet is strong, as net gearing is low at 0.28x at end-Dec 15. A potential near-term catalyst is ramp-up in overseas contributions, which would remove concerns about its overseas execution ability. 

UOL Group ADD, TP S$8.26, S$5.91 close 

  • UOL has high recurring income, underpinned by rentals, hotels and investment income. This provides a sturdy recurring income base. Stock now trades at 28% discount to target price. 

Capitaland ADD, TP S$4.05, S$3.13 close 

  • We like CAPL for its ROE-boosting capital recycling activities. The stock trades at a steep 38% discount to its RNAV.

LOCK Mun Yee CIMB Securities | Yeo Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-03-07
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