City Developments (CIT SP) - UOB Kay Hian 2016-08-12: 2Q16: Hospitality Fizzles, EC Sizzles

City Developments (CIT SP)  - UOB Kay Hian 2016-08-12: 2Q16: Hospitality Fizzles, EC Sizzles CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - 2Q16: Hospitality Fizzles, EC Sizzles

  • 2Q16 saw a boost from full income recognition of an executive condominium (EC) project, Lush Acres. This cushioned the sting from the hospitality segment which remained tepid, as global RevPAR declined 3.7% yoy, mainly attributable to performances in New York, London and Singapore. 
  • A special interim dividend of 4 S cents was announced. 
  • Maintain BUY and target price of S$10.36.


RESULTS


Results marginally below expectations. 

  • City Developments (CDL) reported 2Q16 net profit of S$133.8m, up 0.2% yoy. Gross revenue and operating profit increased by a respective 32.4% yoy and 12.6% yoy, from full recognition of EC project Lush Acres, which saw TOP in Jun 16. This was offset by higher net finance cost (+52% yoy) and higher taxes (+43.3% yoy). 
  • Results were below our and consensus expectations, accounting for about 44% of our full-year estimate, Special interim dividend of 4 S cents/share, similar to 4 cents/share paid in 2Q15.

Lush contributions from full recognition of EC project as hospitality fizzles. 

  • 2Q16 poperty development PBT was up 35.4% yoy mainly due to full recognition from Lush Acres, and contributions from CocoPalms, D'Nest, The Venue Residences and Shoppes.
  • Hotel PBT declined 14.5% yoy, as a stronger US dollar, terror attacks overhang and refurbishments continued to affect trading performances in New York, London and Singapore. Global RevPar in constant currency terms declined 3.7% yoy. 
  • 2Q16 rental properties PBT fell 6.9% yoy, largely attributable to the sale of three investment properties via the Profit Participation Securities Platform 2 announced in Dec 15.


STOCK IMPACT


Improved disclosure. 

  • CDL has been steadily improving its disclosure since the group’s ultimate successful attempt for re-inclusion into the FTSE EPRA/NAREIT. From demarcating its EBITDA segments and disclosing project equity stake, CDL has most recently included occupancy information on its office (97.2%) and retail (93.4%) investment assets.

Cautiously optimistic guidance on healthy response to recent launches. 

  • The soft launch of Gramercy Park met with success, with 31 units sold (18% of the 174-unit project) to-date at average selling price of S$2,600psf (Singaporeans made up over 50% of buyers). The 638-unit Brownstone (launched Jul 15) and 505-unit The Criterion saw respective take-ups of 73% and 25%. JV projects Coco Palms and Commonwealth Towers are about 90% and 50% sold respectively. 
  • CDL plans to launch 519-unit Forest Woods in 2H16. Management struck a cautiously upbeat tone, noting a nascent pick-up in home-buying sentiment.

Third PPS underway - Nouvel 18. 

  • Management continues to mull over likely prospects for the project. In our note ”Taking Charge of Nouvel 18”, we opined that the deal paves the way for CDL to unlock value from Nouvel 18 in a potential third PPS transaction.

Beneficiary of new real estate classification (now under financials). 

  • Real-estate shares will split off from financials (that includes banks and insurers) to become the 11th sector of the S&P 500 starting 19 Sep 16, according to S&P Dow Jones Indices. 
  • As the most liquid residential play on Singapore property, we reckon CDL would be a key beneficiary of the improved visibility and focus on real estate as various index providers adjust their indices.

Overseas projects update. 

  • In China, Tower 1 and 3 (1,374 units) of Hong Leong City Center in Suzhou mixed-use project saw sales of 51 units (S$17m) in 2Q16, bringing total sales to 945 units (69% sold) for about S$409m to-date. Tower 2 is slated for launch in 4Q16. In Shanghai, 85-unit Hongqiao Royal Lake (relaunched in Nov 15) sold 3 villas (S$8m), bringing total sales to 18 villas (about S$69m) to-date. Eling Residences (126 units) in Chongqing is set to launch in 4Q16.
  • In the UK, CDL obtained approval for a £200m 34-unit luxury care home development. Its latest acquisition in Shoreditch is still slated for redevelopment into a 90,000sf office (currently 28,266sf). Management seemed cautious on further acquisitions in the UK, departing from previous mention of footprint expansion, likely on post Brexit volatility. However, CDL remains confident in the UK’s long-term fundamentals.

Hospitality markets in New York, London and Singapore remained tepid although the rest of Asia provides comfort. 

  • Global hotel RevPAR declined 3.7% yoy in 2Q16 as occupancy and average room rates clocked respective declines of 1.4ppt and 2.3% yoy.
  • This was underpinned by lower 2Q16 RevPar performance in New York (-16.6% yoy), Singapore (-10.7% yoy) and London (-4.4% yoy). The bright spot in 2Q16 came from the rest of Asia (RevPAR up 5.1% yoy) on the back of higher occupancy and daily rates.
  • Management attributed the dismal performance in New York (1H16 RevPAR: -15.8% yoy) to increased room supply, stronger US$ and the ongoing refurbishments. Excluding the AEI disruption (est. completion 3Q16), 1H16 New York RevPAR would have declined 8.6% yoy. 
  • We expect Singapore operations to continue seeing weak corporate demand coupled with supply indigestion (+4.7% in room supply this year). London hotels continued to see adverse spillover impact from the recent terror attacks in Brussels and Paris. Management’s strategy is one of cost containment to improve margins, even floating the prospects of hiring consultants to minimise operating costs.

South Beach update. 

  • The former South Beach Hotel, rebranded The JW Marriot Hotel Singapore South Beach, is slated to open in 4Q16. South Beach Office Tower is about 99% leased, with signing rents at about S$10psf pm. The retail component has seen over 76% take-up (50% of basement units to open by end-Oct 16 , remaining 50% by end-16).


EARNINGS REVISION/RISK

  • We retain our 2016 earnings estimates, expecting better second-half contribution.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$10.36, pegged at a 20% discount to our RNAV of S$12.95/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/ 2016-08-12
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.360 Same 10.360


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