City Developments - DBS Research 2017-08-14: Changing Of The Guard

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CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Changing Of The Guard

• City Developments' 1H17 earnings fell 18% y-o-y on lower property development revenue.
• 1H17 Singapore sales more than doubled to 691 units; 9M17 expected >873 units vs 1,017 units in FY16.
• Declared interim dividend of 4 Scents, flat y-o-y.
• CEO Grant Kelly resigned; to be replaced by current Deputy CEO Sherman Kwek.

Maintain BUY; TP at S$12.63. 

• We remain buyers of City Developments (CDL) despite the recent share price rally, on expectations that CDL’s share price remains on an upward trajectory supported by positive catalysts coming from decent sales momentum. 
• We maintain our BUY call on CDL with TP of S$12.63 based on a parity to RNAV or an implied 1.2x P/NAV.
• With the Singapore property market in the nascent stages of recovery, CDL is largely seen as a proxy to the Singapore residential market and has historically traded up to 1.2x-1.3x P/NAV.

Where we differ. 

• Stronger property sales could lift earnings estimates higher. While CDL is largely the preferred stock by those who have gradually turned positive on the Singapore market, we believe that further upside surprises will come on the back of
  1. better than projected sell-through rates at remaining unsold / unlaunched inventories in Singapore,
  2. new landbanking opportunities, and
  3. stronger than projected sales at its International portfolio, mainly in the UK.

1H17 results impacted by lower recognition on development properties; Singapore sales volume more than doubled. 

• 1H17 net profit was S$195m, a 18% drop y-o-y largely due to lower revenue (-10% y-o-y) mainly from lower revenue recognition from property development. 
• 1H17 sales more than doubled, and this was largely from Gramercy Park, The Venue Residences and Commonwealth Towers. Recurring income from hotel and commercial properties portfolios are delivering steady returns.

Valuation

• We maintain our BUY call, TP of S$12.63, based on a parity to RNAV or an implied 1.2x P/NAV.

Key Risks to Our View

• Decline in residential prices in Singapore. As a proxy to Singapore’s residential market, a deteriorating operating environment will cap share price performance.

WHAT’S NEW

Changing of the guard. 1H17 recorded lower earnings y-o-y on lower recognition from property development 

• City Developments Limited (CDL) reported 1H17 net profit of S$195m, a 18% drop y-o-y. This was due to lower revenue (-10% y-o-y), mainly from lower revenue recognition from property development, lower other operating income (-91% y-o-y) from lower gains recognised on realisation of investments in Real Estate Capital Asia Partners Funds (private real estate funds), and share of losses from JVs (S$9m loss in 1H17 vs S$16m profit in 1H16), offset by lower other operating expenses (-23% y-o-y) as a result of a write back of impairment losses following the disposal of an M&C hotel (on which an impairment loss was previously recognised) of S$22m and write back of foreseeable losses from Venue Residences of S$15m which was previously recognised in 2014 and 2015, offset by goodwill impairment of The Lowry Hotel recently acquired by CDL HT of S$7m.
• The lower revenue was mainly due to lower recognition from property development (-22% y-o-y) as Lush Acres EC had received TOP in 2Q16. 1H17 revenue from property development was mainly from Gramercy Park (63% sold), Coco Palms (96%) and The Venue Residences (100%) in Singapore, and progressive handover of units at Phase 1 Suzhou Hong Leong City Center (HLCC), Hongqiao Royal Lake, Shanghai.
• Hotel revenue and PBT grew 4% y-o-y and 5% y-o-y respectively, supported by contribution from Grand Millennium Auckland and M Social Hotel which were added to the portfolio and increased contribution from ONE UN New York whose East Tower was closed for refurbishment in 1H16.
• Rental Properties revenue and PBT fell 8% y-o-y and 22% y-o-y respectively, largely due to the absence of rental income following the disposal of equity interest in Exchange Tower Limited which owned a commercial building in Oct16 and closure of Le Grove Serviced Apartments for a major revamp. The lower PBT was impacted to higher exchange losses (CDLHT) following a repayment of an NZD inter-company loan.
• 2Q17 net profit fell 18% y-o-y to S$110m on lower revenue (-22% y-o-y) following the absence of lump sum recognition from the completion of Lush Acres EC in 2Q16, lower other operating income (-96% yo-y) and share of losses from JV of S$5m in 2Q17 vs share of profits from JV of S$10m in 2Q16.

CEO Grant Kelly announced his resignation, effective 31 Dec 17. 

• Current Deputy CEO, Mr Sherman Kwek will step-up as CEO-designate effective 11 Aug and will assume the CEO role on 1 Jan 18. This is part of the succession plan which has been put in place by the Board since Apr16, hence we believe the transition will be smooth.
• CDL declared a special interim dividend of 4 Scents per share, flat y-o-y.

Review and Outlook 

Singapore residential: 1H17 sales more than doubled; New Futura to launch in 2H17.

• 1H17 property sales more than doubled to 691 units vs 324 units in 1H16 mainly from The Venue Residences which is now 100% sold ahead of the ABSD deadline, Gramercy Park, Commonwealth Towers and The Criterion EC.
• In 3Q17 to-date, the group has sold another 182 units, making a total of 873 units YTD vs 1,017 units in FY16.
• CDL’s existing unsold inventory of its various launched projects in Singapore has reduced to 670 units from 1,033 units in 1Q17, representing close to 11% of total units. CDL’s effective stake in the unsold inventory is close to 428 units (vs 598 units in 1Q17).
• With positive sales momentum at Gramercy Park, CDL plans to launch 124-unit New Futura at Leonie Hill Road in 2H17. South Beach Residences have received strong interest but management continues to monitor market conditions and will launch the project accordingly.
• CDL plans to launch its new project at Tampines Ave 10 (land site acquired from GLS in May17) in early 2018 with an estimated 861 units, when most of the new units in the vicinity is sold.
• Management remains positive on the Singapore property market and continues to look for landbanking opportunities, including development of existing landbank held within its related group of companies.
• The group has commenced a refurbishment programme at Le Grove Serviced residences costing S$30m, which will see an increase in total units to 173 (from the current 97 units). The refurbished property is on track to complete by 2Q18.

Singapore investment properties: S$60m AEI at Republic Plaza; 13% to be leased by CDL corporate office and strategic partner on co-working space, Distrii 

• CDL will refurbish Republic Plaza, commencing in 1Q18 and expected completion is 1H19. The AEI is estimated to cost S$60m, and will increase the retail NLA to 26k sqft from 21k sqft currently.
• Upon completion, CDL’s corporate office is expected to relocate from City House to Republic Plaza by 2Q18, taking up 42k sqft of space. In addition, its strategic partner, Distrii, China’s leading co-working space operator will take-up > 60k sqft by 1H18. This is estimated to translate to c.13% occupancy.
• CDL’s office properties’ occupancy stood at 96.4% vs 95.3% in 1Q17 while its retail properties’ occupancy stood at 98.1% vs 96.8%.

International Residential – 1H17 sales of 140 units mainly from Suzhou project in China.

• CDL’s international projects recorded 1H17 sales of 140 units vs 405 units in 1H16. The lower sales volume was mainly due to strong take-up recorded from the Suzhou – Hong Leong City Center project in 1Q16 of 217 units vs an average of 45 units sold per quarter post 1Q16.
• China. Sales at existing projects such as Hongqiao Royal Lake and Eling Residences have paused given soft demand. For the other projects, we understand that CDL is looking for a partner for its Huang Huayuan, Chongqing project and is exploring potential enbloc opportunities on one of its office tower at Hong Leong Plaza Hongqiao.
• Australia. In 2Q17, the Ivy and Eve project sold another 6 units (take-up rate now at 96% (1Q17 95%), and is expected to compete in 1H2018.
• New launches in UK. CDL expects to launch phase 1 of Teddington Riverside by 2H17 with 57 units. Pipeline projects such as Stag Brewery, Mortlake London and Knightsbridge (Pavillion Road) are expected to be launched from 2019 onwards.

Hospitality.

• Trading performance of M&C is stable (constant currency) – topline was 4% higher y-o-y to GBP 485m while profit grew 1.6% y-o-y to GBP 62m largely led by higher land sales in New Zealand and higher contributions from London and New Zealand.
• RevPAR (constant currency) was up 5%, led by US (+7.5%) following the completion of the refurbishment for ONE UN New York, London (+10.7%) and Australasia (+23%).
• While management saw good demand from Australia and London, management remains cautious on its US performance as it remains loss making.
• CDL will be starting on its AEI (asset enhancement initiative) programme across various hotels in order to improve its product mix to travelers.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-08-14

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 12.630 Same 12.630