City Developments - CIMB Research 2018-02-28: Grow Recurrent Base, Deploy Balance Sheet Capacity

City Developments - CIMB Research 2018-02-28: Grow recurrent base, deploy balance sheet capacity CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Grow Recurrent Base, Deploy Balance Sheet Capacity

  • City Developments' FY17 earnings missed our projection by 11% due to higher impairment charges. City Developments proposed higher total DPS of 18 Scts for FY17.
  • City Developments plans to market 2-3 new residential projects in FY18, totaling 1,781 units.
  • It plans to boost recurrent income to 65% of EBITDA over the longer term.
  • Looking to establish a new asset management platform with a S$5bn AUM target.
  • Maintain ADD with a slightly higher Target Price of S$13.44.

FY17 results below our expectations 

  • City Developments reported a 23%/18% decline in 4Q/FY17 net profit to S$187m/S$538m, missing our projections. This was largely due to lower one-off divestment gains and higher impairment losses on PPE and investment properties. Excluding divestment gains, FY17 net earnings would have declined a smaller 11% y-o-y. 
  • City Developments proposed a special final DPS of 6 Scts on top of an ordinary final DPS of 8 Scts, bringing total FY17 DPS to 18 Scts.

Plans to market 2-3 new residential projects in FY18 

  • FY17 residential development revenue/PBT slipped 5%/14% y-o-y due to a high base for Singapore residential and divestment gains in FY16 as well as lower China contributions. This was partly offset by higher profits from Gramercy Park and gains from sale of partial stake in its Chongqing projects. 
  • In FY18, it will book in profits from The Criterion EC and plans to launch 1,781 units from The Tapestry (Mar), South Beach Residences and West Coast Vale developments.

Stable hotel and rental income 

  • Hotel operations reported a higher PBT, thanks to a full year’s contribution from Grand Millennium Auckland and M Social Singapore, and lower opening expenses from the South Beach Hotel. This helped to offset weaker rental income following the disposal of Exchange Tower in Thailand in FY16. 
  • City Developments will continue to drive higher asset returns through asset enhancement initiatives (AEIs) at Republic Plaza and Le Grove Serviced Apartments.

Growing recurring income, rolling out asset management platform 

  • City Developments targets to expand its recurrent income from the present 56% of EBITDA to c.65% over the next 10 years, to strengthen its earnings base. 
  • At the same time, it plans to grow its asset under management (AUM) to S$5bn by 2023. This will provide a recurrent income base while enabling the group to adopt an balance sheet and asset light strategy to improve ROE and allow for more flexibility in its capital management and recycling.

Maintain ADD 

  • We tweak our FY18-19F EPS post results and revise our RNAV for City Developments to S$16.80 to include new contributions from recently-acquired residential sites as well as higher Target Price for 39%-owned CDLHT. Hence, our Target Price is adjusted to S$13.44, still pegged to 20% discount to RNAV. 
  • In terms of re-rating catalysts, City Developments has a low gearing of 0.09x net debt to equity and is well positioned to deploy balance sheet capacity into new investment opportunities. 
  • Downside risks include slower-than-expected deployment of capital.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-02-28
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 13.44 Same 13.150