City Developments - CIMB Research 2016-10-21: Establishes residential PPS

City Developments - CIMB Research 2016-10-21: Establishes residential PPS CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Establishes residential PPS

  • Unlocking the value of Nouvel 18 through a residential PPS.
  • Accretive transaction with a 2-3 Scts uplift to book NTA and EPS.
  • Well positioned to tap new investment opportunities with low gearing of 19% post divestment.
  • Maintain Add, with a slightly higher TP of S$10.40.

Establishing a residential PPS platform 

  • CIT has unlocked the value of Nouvel 18 through its third profit participation securities (PPS) platform. 
  • Valued at S$977.6m (inclusive of S$12.2m in associated expenses), the structure comprises S$102m of PPS, S$579m of senior loans and S$296m of notes due in 2021-2023. CIT will hold S$140m of the notes (14.3%) due in 2023. 
  • The PPS will be issued to a special purpose vehicle (SPV), Green 18, whose shareholders are high net worth Singaporeans and companies owned by Singapore citizens.

Implied pricing of S$2,750psf for Nouvel 18 

  • Nouvel 18 is a 156-unit luxury condominium project along Anderson Road. The deal effectively prices Nouvel 18 at S$965.4m or S$2,750psf. 
  • Green 18 will enjoy a preferred 5% annual IRR and further upside, less any incentive fees payable. 
  • CIT’s wholly-owned subsidiary Trentwell Management will be appointed as exclusive asset manager and marketing agent for five years (with an option to extend to seven years) to manage, lease, market and sell the units at Nouvel 18.

Accretive deal with positive medium-term spillover benefits 

  • We see this deal as positive for CIT as it would unlock capital to be redeployed into other developments and minimise potential penalty leakages as well as expand the group’s fund management platform with c.S$3.5bn funds under management. 
  • We project CIT to recognise a S$27.3m (3 Scts) boost to book NTA and S$18.2m (2 Scts) gain to bottomline in FY16. Gearing is also likely to dip from 27% to 19% when the transaction is completed, in our view.

Adjusting RNAV by 2 Scts 

  • The implied pricing of S$2,750psf for Nouvel 18 is slightly higher than our current assumption of S$2,600psf. 
  • Post transaction, our FY16 net profit forecast would be raised by c.3%, and our RNAV estimate increased by 2 Scts to S$13.87.

Maintain Add, with slightly higher TP of S$10.40 

  • We continue to like CIT for its ability to unlock value from its assets. With its strong balance sheet and low projected gearing of 19%, it is well positioned to tap new investment opportunities. We see the latter as a key re-rating catalyst for its share price.
  • We maintain our Add rating, with a revised target price of S$10.40, pegged to an unchanged 25% discount to RNAV. 
  • Downside risks to our call include overseas execution risks.

LOCK Mun Yee CIMB Research | Yeo Zhi Bin CIMB Research | http://research.itradecimb.com/ 2016-10-21
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 10.40 Up 10.380