City Developments - RHB Invest 2017-01-17: Watch Out For Acquisitions In 2017

City Developments - RHB Invest 2017-01-17: Watch Out For Acquisitions In 2017 CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Watch Out For Acquisitions In 2017

  • City Developments (CDL)’s share price has rebounded 7% YTD outpacing the STI Index. 
  • We expect outperformance to continue with acquisitions acting as the key re- rating catalyst. 
  • Its UK portfolio (11% of assets) is also set to receive a boost from better-than-expected performance of UK economy. 
  • We further expect a higher recurring income with the South Beach mixed development becoming fully operational. 
  • Maintain BUY with a higher TP of SGD9.70 (from SGD9.40, 10% upside). CDL remains our Top Pick.

Ready to pounce on acquisition opportunities. 

  • City Developments’ (CDL) net gearing would improve substantially to 19% (26% in FY15) post its recent divestments giving a healthy debt headroom of over SGD3bn (assuming a comfortable gearing level of 50%). 
  • With the sizeable war chest, we expect management to engage in sizeable acquisitions in 2017 (likely in Singapore, Japan and UK markets), capitalising on the current weakness of these markets.

UK economy slowly bouncing back post Brexit jitters. 

  • UK economy grew at a better-than-expected (revised estimates) 0.6% in third quarter aided by robust consumer demand shrugging off initial concerns. UK accounted for about 11% of CDL assets and 12% of revenue (as at end-2015). 
  • To date, it has acquired six prime freehold properties in UK, which includes two sites in Knightsbridge and one each in Croydon, Belgravia, Chelsea and Reading. As these projects mainly cater to local demand, we expect interest to remain strong when launched. 
  • Separately, Visit Britain expects visitor arrivals and spending to Britain to increase by 4% and 8.1% respectively in 2017 owing to favourable exchange rates, which should benefit its listed hospitality UK subsidiary Millennium & Copthorne Hotels plc (M&C) (65% stake).

South Beach contributions to fully kick-in 2017. 

  • The newly rebranded JW Marriott hotel (634 rooms) opened its doors in Dec 2016 post renovations. We expect the hotel component to contribute an additional SGD10-15m pa to CDL’s (50% stake) recurring income stream based on a 80% occupancy and room rates of SGD350-400. 
  • Office Tower is 99% leased with average rents of around SGD10 psf. More than three quarters of the South Beach retail space has also been leased with 70% of retail outlets commencing operations. CDL is yet to launch its 190-unit luxury residential units in the project.

Strong sales in recent launches; Expect more overseas 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. 
  • In Singapore, Its recently-launched Forest Woods development saw excellent take-up rates, with > 71% sold to date at a ASP of ~SGD1,400 psf. At high-end Gramercy Park, it has sold 38 of 40 launched units at SGD2,600 psf.

Maintain BUY, with a higher TP of SGD9.70 pegged at a 30% discount to our RNAV of SGD13.86. 

  • We have revised our RNAV estimates higher by 3% factoring in better share performance of its subsidiary M&C and strong sales in new launches. 
  • CDL 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/ 2017-01-17
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.70 Up 9.360