City Developments - CIMB Research 2017-05-11: Good Residential Showing

City Developments - CIMB Research 2017-05-11: Good Residential Showing CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Good Residential Showing

  • 1QFY17 net profit was slightly below, accounting for 15% of our FY17 forecast.
  • Strong performance for Singapore residential.
  • Hotel experienced drag from higher costs.
  • Replenishing residential inventory and redeploying capital to drive future growth.
  • Maintain Add with a higher TP of S$11.63; key risk is a slowdown in the residential markets.

1QFY17 net profit at the lower end of expectations 

  • CDL’s 1QFY17 net profit of S$85.5m came in at the lower end of expectations, making up 15% of our FY17 forecast. 
  • The main drag was from weaker hotel operations, while the income vacuum from the sale of investment properties in FY16 also contributed to the decline. This was partly offset by strong residential contributions.

Singapore residential underpin earnings at 70% group PBIT 

  • Residential operations reported a PBT of c.S$82m, +7% yoy, thanks to progressive billings and additional sales at Coco Palms, The Venue, Gramercy Park in Singapore as well as Suzhou City Centre and Hongqiao Royal Lake in China. 
  • CDL sold S$477m worth of properties in 1Q, mainly at Gramercy Park, Forest Woods and Commonwealth Towers. 
  • The group also replenished its Singapore inventory pipeline with the successful bid for the Tampines Ave 10 site for S$370m. This plot can house c.800 condos.

Hotel performance dragged by higher cost 

  • The hotel division reported a 56% decline in PBIT to S$4.8m despite a slight uplift in revenue as higher admin and interest cost eroded earnings. 
  • In terms of operations, the US and Singapore markets remain challenging, while the rest of Asia region, particularly Seoul and Taipei, was negatively affected by geopolitical tensions impacting the inbound tourism market. 
  • Management said it would review the underperformance, particularly in the US market, and focus on the US management structure.

Investment property portfolio enjoying high occupancy 

  • Rental income was dragged down by the vacuum from asset divestments, such as The Exchange Tower in Dec 16, and the closure of Le Grove Serviced Apartments for a S$30m refurbishment programme. 
  • Nonetheless, the remaining portfolio enjoyed a high occupancy rate of 95-97%. We believe the anticipated bottoming out of the office market in Singapore would likely be supportive of rents from FY18 onwards.

Residential activities drive profit growth; gearing remains low 

  • Looking ahead, we expect residential contributions in Singapore and China (Eling Residences) to drive residential profits, while UK projects could potentially start boosting the bottom line when completed and launched from 2Q17 onwards. CDL plans to market the 124-unit New Futura in 2H17. 
  • The group has also been actively redeploying its capital with c.S$770m worth of new investments YTD. 
  • Nonetheless, gearing remains low at 16% as at 1Q17, giving the group significant room for new investments.

Retain Add call 

  • We tweak our FY17-19F EPS estimates to factor in the rising ASP for Gramercy Park P2, acquisition of the latest Tampines site in Singapore, as well as the Battersea project in UK. Accordingly, our RNAV is lifted by 3.7% to S$14.54. 
  • However, we shift our TP by 10% to S$11.63 as we narrow the assumed discount to RNAV from 25% to 20%, given the nascent recovery in the Singapore residential market and City Dev’s larger-than-peers exposure to Singapore residential of 15-20% of GAV. 
  • Maintain Add.

LOCK Mun Yee CIMB Research | Yeo Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-05-11
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 11.63 Up 10.510