City Developments (CIT SP) - UOB Kay Hian 2017-12-11: Raises Privatisation Offer For M&C

City Developments (CIT SP) - UOB Kay Hian 2017-12-11: Raises Privatisation Offer For M&C CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - Raises Privatisation Offer For M&C

  • The 12% raise in City Developments (CDL)’s privatisation offer for Millennium & Copthorne Hotels (M&C) remains value-accretive (3.3% accretion to RNAV). It implies a 0.76x P/B, suggesting potential acquisition of M&C’s hotel assets at over 25% discount to prevailing market value, providing good potential to unlock value. 
  • CDL will fund the transaction through internal cash resources and bank borrowings. 
  • Maintain BUY with an unchanged target price of S$14.03, pegged at parity to RNAV, pending M&C’s minority shareholders’ approval of the offer.



WHAT’S NEW

  • City Developments (CDL) announced that Millennium & Copthorne Hotels Plc’s (M&C) independent directors have reached an agreement on the increased privatisation offer of 620 pence per M&C share (comprising of a cash amount of 600 pence and a special dividend of 7.5 pence per share). This is 12.2% higher than the earlier proposed possible offer of 552.5 pence per M&C share on 6 October (comprising of a cash amount of 545 pence and a special dividend of 7.5 pence per share). 
  • CDL indirectly owns about 65.2% of M&C currently.
  • M&C's independent directors consider the terms of the final offer to be fair and recommend that shareholders accept it.
  • Upon acquisition, CDL intends to run M&C’s hotel businesses as an owner and operator (and maintain its current business model).
  • The Offer Document and the Form of Acceptance accompanying the Offer Document are expected to be published within 28 days of this announcement.


STOCK IMPACT


Privatisation of M&C is value accretive if it goes through. 

  • The raised offer of 620 pence per share is still at a 0.76x P/B, suggesting potential acquisition of M&C’s hotel assets at over 25% discount to prevailing market value. EPS could potentially rise by 4.3% and NTA per share could potentially rise by 1.6%.

Unlocking of value in M&C. 

  • Although CDL has explicitly stated its intention to not sell, or repurpose any of the M&C hotels in London or New York for at least three years, its hotel assets in other geographies make up a hefty 56% of its total hotel operating assets (or £1.499b). 
  • One of the means to unlock the remaining 56% of M&C hotel operating assets is in changing the ownership structure, such as parking them into a REIT (and owning them via share ownership into the REIT). Also, streamlining of operations and bringing synergies in will also help to narrow the valuation discount that investors typically apply for asset-heavy hotel operators, due to their high capex requirements and difficulties scaling up.

Funding. 

  • CDL will provide for the cash consideration payable under the Final Offer from its existing cash resources as well as funds made available to CDL under a S$800m dual currency credit facility provided by Oversea-Chinese Banking Corporation Limited.

Improving hospitality outlook. 

  • We believe CDL’s acquisition of M&C may also ride on improving global RevPAR and increasing its earnings exposure to hotel operations.
  • Globally, certain key markets like London and New York are seeing improved RevPar (comparing 9M17 with 9M16). RevPar for Australasia has also been growing yoy over 2014-9M17.


VALUATION/RECOMMENDATION

  • Factoring in the raised offer price of 620 pence per share would result in a 3.3% accretion to our RNAV. There would also be a 12% RNAV accretion potential if unlocking of value in M&C could bring its fair value to its book value of 820.6 pence. 
  • We maintain BUY with an unchanged target price of S$14.03 pegged at parity to our RNAV, pending M&C’s minority shareholders’ approval for the offer.




Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2017-12-11
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.030 Same 14.030



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