City Developments - RHB Invest 2016-08-12: Asset Monetisation The Key Driver Ahead

City Developments  - RHB Invest 2016-08-12: Asset Monetisation The Key Driver Ahead CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Asset Monetisation The Key Driver Ahead

  • CDL’s share price has outperformed the STI by 17% YTD and is now close to our SGD9.04 TP (2% upside). 
  • Though 2Q16 was broadly in line, amid these increasing global market uncertainties, we recommend early investors to TAKE PROFIT (from Buy) and accumulate on any sharp dips. 
  • Singapore performance remained steady despite a tough residential market. Its hotel segment was weak, and we expect this to persist amidst a challenging global hospitality sector. 
  • Key catalysts ahead are asset monetisation via PPS structures and relaxation of cooling measures.

Steady Singapore performance. 

  • City Developments (CDL) sold 324 units in 1H16 (1H15:178 units) despite a tough property market, with a total sales value of SGD385.7m (1H15: SGD224m). The soft launch of its high-end project Gramercy Park saw good response, with 31 of 40 launched units sold at an ASP of SGD2,600psf.
  • In 2H16, CDL will be launching its Forest Woods (50% stake) located at Lorong Lew Lian. Considering the project’s close proximity to Serangoon MRT and bus interchange and other amenities we expect a good take-up. 
  • On land banking, management remains cautious on Singapore property and does not intend to bid aggressively to acquire sites.
  • Hotel performance remains soft – CDL’s 65%-held subsidiary, Millennium & Copthorne Hotels (MLC LN, NR), registered a weak 1H16 with PATMI declining 17% YoY despite revenue increasing 3.5% YoY. The key reason was a revenue per available room (RevPAR) decline across key gateway cities of New York, London and Singapore. Management noted that it takes a longer-term view on the sector and plans to focus on cost rationalisation to increase profitability in the near term. With an uncertain global market and weak corporate travel, we expect hotel segment performance to remain soft for rest of the year.

Share price up 16% YTD, TAKE PROFIT. 

  • CDL’s share price has done well since the beginning of 2016, outperforming the STI by 17% and is now close to our SGD9.04 TP. 
  • Taking into account the increased uncertainties in the Singapore market and UK property market post Brexit, we recommend early investors to take some profit and accumulate on any dips. 
  • Our TP remains SGD9.04, pegged at a 30% discount to its RNAV.

Active portfolio rationalisations the key driver. 

  • CDL has been actively rationalising its portfolio over the last few years and has been successful in realising value through two rounds of profit participation securities (PPS). In July 2016, it also announced the disposal of its entire 52.5% stake in its HK listed subsidiary City e-Solutions for a consideration of HKD566.4m (SGD98.2m), ie at 119% premium to book value and 4% higher than the last closing price. 
  • Management noted that the recent acquisition of a 50% stake from its JV partner Wing Tai for the Nouvel 18 project will give more operational flexibility in terms of bulk sale or capital market transaction. 
  • CDL is also currently understood to be in talks to monetise a few of its high-end projects via a third round of PPS structure.

South Beach update. 

  • South Beach Office Tower, which is part of the group’s mixed-use JV development at Beach Road, is 99% leased with average rents of around SGD10psf. More than 76% of the South Beach retail space has also been leased, to date. Over 50% of the basement units will commence operations by Oct 2016, with the remaining space to be opened by end-2016. 
  • The 654-room hotel component in South Beach is currently closed and will be soon repositioned and rebranded as JW Marriot Singapore.

No major impact to its UK portfolio post Brexit. 

  • CDL has a pipeline of six residential projects to be launched in UK markets over the next few years. Most of its projects are located outside central London and are focused on the local market, shielding it from short- term volatilities. 
  • Management sees some stabilisation in UK property post Brexit and expects some short-term weakness – but remains optimistic on long-term prospects.

2Q16 results broadly in line. 

  • CDL’s 1H16 PATMI of SGD239.1m accounted for 32% of our full year forecast. Excluding timing differences for recognition and slightly weaker hotel segment performance, the results were broadly in line. We maintain our earnings estimates as we expect additional contributions from Suzhou Hong Leong Center (Phase 1) and Gramercy Park in 2H16.
  • In 1H16, the Property Development segment was the biggest contributor to PBT accounting for 53% (1H15: 49%), followed by Rental Properties at 21% (1H15: 19%), Hotel Operations 20% (1H15: 29%) and Others 6%(1H15:3%). No impairment losses were recorded for its investment properties. CDL announced a special interim dividend of 4 cents, similar to last year.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-12
RHB Invest SGX Stock Analyst Report TAKE PROFIT Downgrade BUY 9.040 Same 9.040