City Developments - Maybank Kim Eng 2016-05-12: Buy on this Dip

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CITY DEVELOPMENTS LIMITED C09.SI 

City Developments (CIT SP) - Buy on this Dip 

Maintain BUY; EPS cut by 1-4% 

• The low development profit recognition was inline, but we see the sharp fall in hotel profits as a miss. EPS cut by 1-4% for this. 
• CityDev is still one of the best stories in the sector and we see the current share price correction as a buying opportunity. Its plan to achieve an AUM of SGD5b implies that more assets will be monetised and this could narrow the gap between the share price and its RNAV. 
• Maintain BUY. Trim TP and RNAV by < 1% to SGD9.82 and SGD11.91 on EPS adjustments. 
• Our implied 18% RNAV discount is derived via consistent discounts across the sector, based on the outlook for the various sub segments. 

Low development profits inline; Hospitality a miss 

• 1Q16 net profit declined by 14% YoY to SGD105m. The weaker performance was driven by a sharp fall in hotel profits and low recognition from its property development business. This made up 13% of our full-year estimates. 
• Despite poor development income, we see this as inline as it should report better performance for the rest of the year as it recognises profits from pre-sold homes and new launches. 
• However, the persistent weakness at its hotels was a miss. PBT fell by a sharp 68% from a 4.7% decline in Global RevPAR, in constant currency terms. 

All eyes on Gramercy Park 

• The successful launch of Cairnhill Nine by CapitaLand and the recent sales pick-up at OUE Twin Peaks suggest better sentiment in Singapore’s high-end market. This bodes well for CityDev’s impending launch of Gramercy Park, where it reported positive interest from its current roadshows overseas. If this launch proves to be successful, it could line up other high-end projects for sales. 
• Nouvel 18 (50% JV with Wing Tai) has been completed and The South Beach Residences will be completing in 2H16. 

Updates on overseas platform 

• CityDev bought its first commercial redevelopment site in the UK for GBP37.4m. It plans to redevelop the 28,266 sf office building to a new 90,000sf development. 
• It expects to book profits from Hong Leong City Centre and Hongqiao Royal Lake from 2H16, where another 217 and 2 units were sold over the quarter, respectively. 

Swing Factors 

Upside 

• Monetisation of investment assets conservatively held at cost. 
• Re-inclusion in FTSE EPRA/NAREIT Global Real Estate Index. 
• Renewed interest in Singapore’s high-end residential market. 

Downside 

• Sharp fall in home prices, necessitating impairment charges. 
• Poor execution of overseas projects. Recent ventures into China, the UK and Japan have raised risk profile. 
• Sharp increase in interest rates could hit demand for properties and drive down asset prices.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-12

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 9.82 Down 9.84