City Developments - RHB Invest 2016-06-27: Knee-Jerk Reaction Presents Buying Opportunities

City Developments - RHB Invest 2016-06-27: Knee-Jerk Reaction Presents Buying Opportunities CITY DEVELOPMENTS LIMITED C09.SI 

City Developments - Knee-Jerk Reaction Presents Buying Opportunities

  • City Developments’ (CDL) share price fell by 4.4% amidst investor concerns on Brexit’s impact to its UK portfolio. 
  • We believe the correction is overdone as the overall impact is well-cushioned by its effective hedging policies and strong balance sheet. 
  • Key catalysts ahead are its asset monetisation abilities and its strong project execution capabilities. 
  • CDL remains our preferred large-cap pick, with a revised TP of SGD9.04 (from 9.40), implying a total return of 11%.

Currency impact mitigated by hedges. 

  • As at 2015, UK markets accounted for about 11% of CDL’s assets and 12% of its total revenue. With GBP- denominated loans accounting for 12% of total borrowings, the impact to its balance sheet from sharp depreciation of the GBP is likely to be less severe. 
  • Additionally, the group also engages in active forward hedging contracts to match its receipts and payments. For 2015, a 10% depreciation of GBP against SGD would have resulted in a corresponding 4% decline in overall PBT.

Robust balance sheet = strong holding capacity. 

  • To recap, CDL established its UK real estate platform in 2013 as a part of its diversification strategy, setting aside up to GBP300m. It has acquired six prime freehold properties in the UK for GBP157m (two sites in Knightsbridge and one each in Croydon, Belgravia, Chelsea and Reading). 
  • More recently, it purchased its maiden commercial redevelopment project there for GBP37.4m. While Brexit could pose near-term headwinds for its UK properties in terms of demand and prices, CDL’s healthy balance sheet (net gearing of 0.26x) provides good holding power for timing future project launches. 
  • Additionally, it could also tap into distress opportunities in the UK property market arising from the fallout of Brexit.

Weak GBP could propel inbound leisure tourism. 

  • On the hospitality front, CDL’s UK-listed subsidiary Millennium & Copthorne Hotels (M&C) (65% stake) operates 22 of its 126 hotels in the UK market. M&C’s management announced that the impact of the outcome of the referendum is likely to create uncertainty for the business over the medium term, and will keep a close watch on the negotiation outcomes between EU and respond accordingly. 
  • While the near- term uncertainty could impact UK’s economy and suppress business travel, we expect leisure tourism to potentially get a boost from the weak GBP.

Asset monetisation and strong execution capabilities the key catalysts.

  • CDL is currently understood to be on the lookout for investors to monetise its high-end assets (estimated at SGD350m) via third profit-participation securities (PPS). We also expect another round of PPS to potentially unlock value from its South Beach project, with a GDV north of SGD3bn. 
  • The re-inclusion of the stock into the FTSE EPRA/NAREIT Global Developed Index may also continue to support the share price in the near term. 
  • Maintain BUY, with a revised SGD9.04 TP, after adjusting for the foreign exchange rates and its revised stake value in M&C. 
  • Downside risks to our call include a prolonged downturn of Singapore’s property sector and a potential global economic downturn arising from the UK’s exit from the EU.

Vijay Natarajan RHB Invest http://www.rhbinvest.com.sg/ 2016-06-27
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.04 Down 9.35