City Developments - CIMB Research 2016-05-12: Drags from residential and hotel

CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Drags from residential and hotel

1QFY16 net profit in line at 20% of our FY16 forecast.
Lack of new residential launches and lower hotel performance dragged performance.
Weaker revpar and higher expenses eroded hotel profits.
More investments in the UK with office redevelopment project.

CIT’s 1QFY16 results were within expectations, accounting for 20% of our FY16 net profit forecast. The group reported an 11% decline in revenue to S$723.3m (US$529m), reflecting slower residential and hospitality activities.
EBITDA margin remained fairly stable at c.25%. However, net profit dropped a higher 14.4% yoy to S$105.3m (US$77m) on the back of weaker operational performance and lower associate contributions, despite a lower effective tax rate of 10.5% (14.6% pcp).

Residential revenue and PBIT deteriorated 25% and 22%, respectively, to S$223.3m and S$76.5m due to a high base (100% of Rainforest EC).
In 1Q16, completion of Haus @ Serangoon, progressive billings of D’Nest, The Venue Shoppes and other projects underpinned earnings.
Although it has secured RMB2.17bn and £18.4m of sales in China (Hong Leong Center, Hongqiao Royal Lake) and the UK (Hanover House), these will be recognised in 2H16. It is planning to launch Gramercy Park in 2H as well.

Hotel division reported a 4.4% yoy decline in revenue as portfolio Revpar slipped 2.6% yoy on weaker New York, London and Singapore performance. However, PBT fell a greater 68% yoy with ongoing refurbishment works and inclusion of a higher share of pre-operating expenses of the South Beach. The latter will be rebranded as the JW Marriott Singapore.
We anticipate this division to show moderate growth in the near term.
CIT also plans to refurbish its Millenium hotels in Mayfair and Knightsbridge.

Against a slower Singapore residential market, we expect CIT’s overseas development activities to fill in the near term domestic income slack. Plans are afoot to launch P2 of HLCC in 2H16 and its Tokyo luxury apartment project in Tokyo in 4Q17.
Other projects in the UK are in various approval and planning stages. The group has also ventured into office redevelopment with its £37.4m investment in Development House in Shoreditch. The 28,266sf property can be expanded into a 90,000sf development.

We retain our Add call with an unchanged target price of S$10.32, pegged to a 25% discount to RNAV of S$13.76.
CIT’s valuations are attractive at 42% discount to RNAV.
CIT is well positioned to tap new investment opportunities with S$3.3bn in gross cash reserves and low 26% gearing.
Removal of concerns over its overseas execution track record with profits rolling in in 2H would act as a catalyst for the share price.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-05-12

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