City Developments (CIT SP) - Maybank Kim Eng 2018-02-28: Strong Residential Proxy

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CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - Strong Residential Proxy

Maintain BUY with higher Target Price

• City Developments' FY17 EPS is in line, at 96% of our forecast. Management aims to raise recurring income and attain USD5b AUM by 2023. 
• We increase 2018-19E EPS by 2% and our RNAV to SGD14.19 from SGD13.82. This factors in:
  1. higher residential ASPs;
  2. three newly-acquired sites; and
  3. marginally higher commercial valuations, partially offset by a lower market value for M&C (MLC LN, Not Rated). 
• Accordingly, we raise our Target Price by 3% to SGD14.20, still based on parity with RNAV. Maintain BUY. With Singapore’s residential market accounting for an estimated 34% of its RNAV, we see CityDev as the most liquid proxy for a residential rebound.
• Risks to our view include sharp fall in property prices.

Strong balance sheet; higher DPS 

• With a net gearing of only 10%, management announced a 2cts hike in DPS, which takes FY17 payout to 18cts. It intends to raise recurring income to 65% of EBITDA from 56% in 2017 over the next decade. It will seek out opportunities in the office, hospitality and residential sectors.
• New CIO, Mr Frank Koo, also has a vision of achieving USD5b AUM by 2023. About 60% will be deployed for lower-risk core/core+ assets and 40%, for value-added or opportunistic projects with higher returns.

Raising residential ASPs 

• We adjust our numbers for higher-than-expected residential ASPs. For one, strong pricing at New Futura leads us to raise its ASP to SGD3,200 psf from SGD2,950. We believe CityDev’s impending launch of South Beach Residences in mid-2018 will test the sustainability of the recent pick-up in the high-end market.

Restocking with three new residential sites 

• We also incorporate newly-acquired sites at Handy Road, West Coast Vale and Sumang Walk (executive condos). These three tender wins should add 930 private units and 820 ECs to its pipeline. They should turn CityDev into an even stronger proxy for the recovering housing market.
• Assuming ASPs of SGD2,600 psf for its prime Handy Road project, SGD1,400 psf for West Coast Vale and SGD1,050 psf for its ECs, we estimate a development surplus of 13 SGD cts from all three.

Swing Factors

Upside

• Monetisation of investment assets conservatively held at cost.
• Renewed interest in Singapore’s high-end residential market.
• Strong rebound in home sales.

Downside

• Sharp fall in home prices, necessitating impairment charges.
• Poor execution of overseas projects. Recent ventures into China, the UK and Japan have raised risk profile.
• Sharp increase in interest rates could hit demand for properties and drive down asset prices.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-28

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 14.20 Up 13.800