City Developments - RHB Invest 2016-10-24: Third Round Of PPS Structure to Unlock Nouvel 18 Value

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CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Third Round Of PPS Structure to Unlock Nouvel 18 Value

• City Developments (CIT SP) has announced the sale of its 100% stake in Nouvel 18 (a 156-unit luxury project along Anderson Road) through a third round of the Profit Participation Securities (PPS) platform for SGD977.6m. 
• The deal marks the beginning of the first of such capital market transactions aimed at Singapore high net worth investors. The transaction will be done via three sources: 
  1. Issuance of ordinary and preference shares for SGD102m (10.4% of total funds); 
  2. Senior bank loans for SGD579.2m (59.3%); 
  3. Issuance of notes to DBS Bank maturing in 2021 for SGD156.4m (16%) and CDL will subscribe for the remaining SGD140m (14.3%).
• CDL has obtained the required clearance certificates from the Land Dealings (Approval) Unit on 20 Oct 2016. The PPS structure is for a period of five years, with option to extend for another two years.

Our view: 

• The move doesn’t come as a surprise to us, as we have been largely anticipating such a deal post the buyout of 50% JV stake from Wing Tai earlier this year. Recall that CDL bought a 50% stake from Wing Tai in June for SGD411m or ~SGD2,350psf.
• The current sale price translates into SGD2,750psf for the project. This is in-line with recent market transactions of Ardmore 3 (~SGD 2,700-2,800psf post discounts) and Gramercy Park (SGD2,500 - 2,600psf). More importantly CDL has avoided total qualifying certificate (QC) charges of nearly SGD229m payable over next three years if no units were sold in the project. 
• Post completion of sale, CDL will be booking a net gain of SGD27m, which is slightly lower than what we had expected. 
• Net gearing will also be reduced from 27% to 19%. 
• We maintain our Take Profit recommendation with an unchanged TP of SGD9.04.
• The following are some of the key points of the transaction: 
  1. The ordinary and preference shares have been subscribed by 14 high net worth Singaporean investors with investment sizes ranging from SGD7-8m each. Media sources have identified some of the investors as Osim International founder Ron Sim, Straits Trading Co chairman Chew Gek Khim, Fragrance Group owner Koh Wee Meng and an upscale property developer Satinder Garcha, among others. The investors will receive a preferred return of 5% pa as well as upside from the sale of units at higher prices after deducting any incentive fees payable.
  2. The PPS structure is done via a share recapitalisation structure thus it is not subjected to any further taxation ie additional buyers stamp duty (ABSD) charges (10%) and ownership share transfer charges (0.2%).
  3. CDL will continue to manage the asset and receive an asset management fee in exchange. In addition, It will also receive an incentive fee after the benchmark returns are met.
  4. As the end purchasers are Singaporeans, the QC will be cancelled and no QC charges are payable. CDL would have incurred a QC charge of SGD38.2m in Nov 2016, SGD 76.4m next year and SGD114.6m the year after, had it not sold a single unit over next three years.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2016-10-24

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