City Developments - DBS Research 2016-08-12: Some light from property development

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CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Some light from property development

• 1H16 results were impacted by hotel operations and lower share of profits from JV projects.
• Growth in property development was offset by hotel division.
• Potential S$605m from property sales to be recognised in 2H16. 

Attractive valuations. 

• Despite the recent rally in City Developments (CDL)’s share price, we continue to see good value at 0.8x FY17F P/NAV, at 1 standard deviation below historical average. 
• Key catalysts 
  1. potential injection of assets into Profit Participation Securities (PPS), 
  2. better margins from property development and hotel operations, and 
  3. higher property sales.

1H16 results impacted by hotel operations and lower share of JV profits. 

• 1H16 net profit fell 6.8% y-o-y to S$239m, forming 39% of street’s FY16 estimates. 
• Despite 1H16’s revenue growth of 11% y-o-y (from property development offset by lower investment properties), net profit fell mainly due to lower contributions from share of profits from JV projects. 
• EBIT margins were dragged by lower hotel margins. CDL is expected to recognise an estimated S$605m of property sales from projects in Singapore, China and Australia.

Some light from overseas investments. 

• CDL’s decision to diversify into the overseas property market amid a challenging outlook in the Singapore property market is finally coming to fruition. CDL expects to recognise approximately S$605m of property sales in 2H16 as property projects are completed.
• Most of the ongoing overseas projects (China, UK, Australia, Japan, Korea, US) are expected to complete from 2H16 onwards. We believe this could partly offset the impact of a weak property market in Singapore.

Valuation

• We maintain our BUY call and raise TP to S$9.90 (from S$9.60), pegged to 20% discount to our revised RNAV of S$11.90. 
• Supported by a strong balance sheet and diversified earnings base, CDL should be able to navigate around the current uncertain market conditions well.

Key Risks to Our View

• Decline in residential prices in Singapore. As a proxy to Singapore’s residential market, a deteriorating operating environment will cap share price performance.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2016-08-12

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 9.90 Up 9.600