City Developments Limited - Phillip Securities 2016-10-24: Delayed gratifications in Core Central Region properties

City Developments Limited - Phillip Securities 2016-10-24: Delayed gratifications in Core Central Region properties CITY DEVELOPMENTS LIMITED C09.SI

City Developments Limited - Delayed gratifications in Core Central Region properties

  • 3rd Tranche of PPS involving Nouvel 18 unlocked value for shareholders, avoided impending QC charges and grew fund management business.
  • Strong take up of newly launched Forest Woods condominium suggests homebuyers continue to favour smaller-sized units.
  • South Beach is on track to be fully completed by 4Q16; office and retail space largely leased.

Investment Merits

Thinning supply of new CCR properties and low land sales activity in CCR expected to boost prices; CDL expected to benefit with significant exposure to CCR 

  • New supply of CCR units will likely remain scarce moving forward underpinned by low land sales activity in CCR. 
  • We opine that the shrinking supply of CCR properties will eventually lift the segment’s price. 
  • Unsold units in CCR made up 40.7% of total unsold units under CDL’s portfolio of development properties, and CDL is well-positioned to benefit in the scenario of a market turnaround given its large exposure to CCR properties.

No risk to do a fire sale for now; Strong balance provides holding power to stash unsold units 

  • CDL has seven development projects which have more than 10% unsold units within the project. 
  • Apart from two projects, and assuming a gradual absorption of these unsold units based on transaction history, CDL remains in good stead to clear the inventory of unsold units. 
  • Given the Group’s strong balance sheet (net gearing of 20% after including fair value gains on investment properties), it is not pressed for time to clear these units.

Recurring income from investment properties; solid execution for Group’s office portfolio 

  • Rental Properties segment contributed 21.3% of total profit before taxes (PBT). The segment has provided a certain degree of earnings visibility, and helped to insulate its performance during market slowdowns. 
  • Within the Group’s investment properties, office properties formed bulk of the portfolio’s value (72.6%). The Group’s portfolio of offices continues to enjoy healthy occupancy of 97.4% versus the national average of 90.9 % as at 2Q16 despite the softness in demand for office space.

Millennium & Copthorne (M&C) currently is currently trading at 0.56X price-to-book value; significantly below 10-year average of 0.7 

  • M&C carries most of its hotels at cost, less depreciation and impairment charges on its books. Despite this, M&C currently trades at a deep discount of close to 0.56 times book value, below the 10 year historical mean of 0.7 times.

Hotel assets in M&C provides fuel for asset monetisation and catalyst for share price upside 

  • We believe that CDL will continue its momentum in asset monetisation via M&C, as we note previous monetization strategies by the Group which included the restructuring of Singapore assets by M&C via the initial public offering of CDL Hospitality Trust (CDLHT), as well as the listing of China-focused developer First Sponsor, which reduced CDL’s deemed stake in the company from 46.3% to 35.6% post listing.

Initiating coverage with “ACCUMULATE” rating and target price of S$9.98 

  • We favour CDL for its exposure to CCR inventory and strong balance sheet, and we believe that the market has overly discounted the developer. This is on top of the fact that CDL holds its investment properties based on historical cost. 
  • With the successful launch of 3rd tranche of PPS, CDL does not face any impending Qualifying Certificate (QC) charges or claw back of Additional Buyer’s Stamp Duty (ABSD) remission until September 2017.

Peter Ong Phillip Securities | Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2016-10-24
Phillip Securities SGX Stock Analyst Report ACCUMULATE Initiate ACCUMULATE 9.98 Same 9.98