City Developments - RHB Invest 2017-01-03: Acquisitions Beckon In 2017

City Developments - RHB Invest 2017-01-03: Acquisitions Beckon In 2017 CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Acquisitions Beckon In 2017

  • We expect City Developments to engage in more acquisitions in 2017 as gearing levels have fallen below 20%, providing healthy headroom for debt. 
  • It has, once again, demonstrated its ability to monetise assets via a third PPS structure in Oct 2016, building its funds under management to SGD3.5bn. 
  • Strong sales in its new launches also demonstrate its excellent project management capabilities amid tough market conditions. 
  • Maintain BUY, with a RNAV-based TP of SGD9.36.

Lightened balance sheet gives ample headroom for acquisitions. 

  • City Developments’ net gearing may improve substantially to 19% (26% in FY15) post its recent divestments of a high-end project, Nouvel 18, via the profit participation securities (PPS) structures, giving a healthy debt headroom of over SGD3bn (assuming a comfortable gearing level of 50%). 
  • We expect management to engage in sizeable acquisitions in the near term, capitalising on the current weakness of the market.

Divestment of Nouvel 18 clears high-end inventory overhang. 

  • The property developer successfully monetised its Nouvel 18 development in October, selling its 100% stake to high net worth Singaporean investors for SGD978m (SGD2,750 psf), and booking a net gain of SGD27m. The move was positive, as it not only cut the risk of its balance sheet shouldering sluggish high-end inventory, but also helped it to avoid about SGD229m in QC charges.

More PPS could be in store for 2017. 

  • We believe City Developments can do similar PPS structures for its remaining high-end units and, in the longer term, potentially monetise its South Beach project, which has a GDV north of SGD3bn. 
  • While we acknowledge that there are risks in PPS if the Singapore property market fails to rebound in the 5- to 7-year horizon for PPS structure, this would allow the company to take better stock of the market and time its property sales better.

Expect more overseas project launches in 2017. 

  • In 2017, we expect it to launch South Beach Residences in Singapore and its overseas projects in the UK, Japan and China depending on market conditions. Its recently-launched (ie October) Forest Woods development saw excellent take-up rates, with 71% sold to date at a ASP of SGD1,400 psf. At Gramercy Park, it sold 38 of 40 launched units at SGD2,600 psf.

Maintain BUY

  • Maintain BUY, with a TP of SGD9.36 pegged at a 30% discount to our rolled-over RNAV of SGD13.37. 
  • City Developments remains our Top Pick in the developer space, for its asset monetisation ability, nimble capital management and acquisition potential.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-01-03
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.360 Same 9.360