City Developments - DBS Research 2017-10-10: Bold And Swift Move By Kweks

City Developments - DBS Vickers 2017-10-10: Bold And Swift Move By Kweks CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Bold And Swift Move By Kweks

  • Possible cash offer of 552.5 pence per Millennium & Copthorne Hotels (M&C) share.
  • Offer price close to last peak of 605 pence/share in 2014, and implies 0.7x P/BV and 12x FY17E EV/EBITDA.
  • Potential RNAV accretion to CityDev of S$2.03 per share with 100% stake, and marked to NAV.
  • Benefits from full control -
    1. synergies and potential repositioning of assets;
    2. pipeline of assets for potential injection into CDL Hospitality Trust.

Maintain BUY; Target Price S$12.63. 

  • Despite City Developments' recent share price rally, we maintain our BUY call on City Dev with Target Price of S$12.63 based on a parity to RNAV, which implies 1.2x P/NAV. 
  • With the Singapore property market in the nascent stages of recovery, City Dev is largely seen as a proxy to the upward trends in 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 City Developments is largely the preferred stock of 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. further new landbanking opportunities, and
    3. stronger than projected sales at its International portfolio, mainly in the UK.

WHAT’S NEW - Bold and swift move by Kweks 

Possible cash offer to acquire all outstanding M&C shares: 

  • City Developments (City Dev) announced a possible cash offer to acquire all the outstanding Millennium & Copthorne Hotels (M&C) shares for 552.5 pence per share (545 pence cash + 7.5 pence of special dividend per share). The price implies P/BV of 0.67x and 12x FY17E annualised EV/EBITDA.
  • City Dev has until 6 November 2017 to either make a formal offer or express that it does not intend to make an offer. The proposed offer is at a 21.4% premium to M&C’s closing price on 6 October 2017, and a 22% premium to the 1-month volume-weighted average share price of M&C shares.
  • City Dev has confirmed that it intends to maintain M&C’s current business model, in particular to run the business as an owner and operator of its hotel portfolio. City Dev also has no intention to sell or repurpose any of M&C’s hotels in London or in New York.

Offer price looks attractive vs trading history. 

  • The offer price is attractive compared to the stock’s own recent trading history, pricing it close to its last peak of 605 pence/share, last seen in 2014. M&C’s share price has fallen below 500 pence since Oct15 to a low of 366.4 pence in Jun16 and has traded at an average level of 445 pence since then.
  • Based on the offer price, the multiples at 0.67x P/BV and 12x FY17F EV/EBITDA will also price it below the average multiple that global hospitality players are currently trading at (average FY17F EV/EBITDA of 14.3x).
  • We estimate potential earnings accretion of 7% to City Dev’s FY18F earnings based on M&C’s FY18F consensus earnings and the privatisation being fully debt funded.

Potential S$2.03 per share accretion to City Dev’s RNAV with valuation of M&C marked to NAV. 

  • We see this as a positive move from City Dev. If it is successful in gaining control of M&C (NON RATED), we see a lot of synergies and value that the group can benefit from. Most importantly, City Dev will have full flexibility to extract value in the group either through repositioning of its hotels into commercial/residential projects.
  • This follows the streamlining of listed groups in recent times (privatisation of CapitaMalls Asia by CapitaLand limited back in 2014 and privatisation of Pan Pacific Hotels by UOL in 2013), which had somewhat resulted in a reflation in valuation post announcement of these strategic initiatives.
  • With full control over M&C and potential synergies that could be extracted in the medium term, City Dev could raise its RNAV by a maximum estimated S$2.03 per share assuming City Dev increases its stake in M&C to 100%, which is marked to NAV.

Pipeline of assets for potential injection into CDL HT. 

  • In addition, post this restructuring, City Dev would have a ready pipeline for potential injection into CDL Hospitality Trust (CDL HT) which allows the latter to continue to grow its platform, AUM size and to further maximise economies of scale with both platforms combined.
  • We maintain our BUY ratings on both City Dev and CDLHT (TP:S$12.63 and S$1.75).


  • We maintain our BUY call, Target Price of S$12.63, based on a parity to RNAV, which implies 1.2x P/NAV.

Key Risks to Our View

  • Non-completion of privatization. The inability to complete the privatization exercise could limit the potential upside to RNAV.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-10-10
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 12.630 Same 12.630