City Developments (CIT SP) - UOB Kay Hian 2018-03-01: 4Q17 Riding On Residential Sales Momentum

City Developments (CIT SP) - UOB Kay Hian 2018-03-01: 4Q17 Riding On Residential Sales Momentum CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - 4Q17 Riding On Residential Sales Momentum

  • While results were slightly below expectations, management remains optimistic on prospects for the Singapore residential property segment, expecting minimal impact from the increased BSD. 
  • Management aspires to build a new fund management platform with an AUM target of US$5b by 2023. Management is looking to build its recurring income base to 65% of earnings, tapping on its strong cash hoard and acquisition headroom. 
  • Maintain BUY and target price of S$14.03.



RESULTS


Results slightly below expectations. 

  • City Developments (CDL) reported 4Q17 net profit of S$186.7m, down 23.4% y-o-y. This brings 2017 net profit to S$538.2m, down 17.6% y-o-y, due to lack of contributions from the Hong Leong City Center (HLCC) in Suzhou, higher-margin projects like Coco Palms, D’Nest and Lush Acres executive condominium (EC), divestment of its 52.52% interest in City e-Solutions Limited, sale of Exchange Tower and recapitalisation of Summervale Properties. 
  • Earnings are below our expectations, at 93% of our estimate.

Segmental performance. 

  • 4Q17 property development PBT was down 20.4% y-o-y due to absence of contributions from HLCC, Coco Palms, D’Nest and Lush Acres EC, and divestments. 4Q17 saw hotel operations turning positive y-o-y due to increase in hotel revenue contribution, lower operating expenses at JW Marriott Hotel Singapore South Beach (closed for six months in 2016) and M Social Singapore (opened in 3Q16), partially offset by higher impairment loss of $49.2m. 
  • During the quarter, rental property PBT declined 60.6% y-o-y due to absence of gains on sale of equity interest in Exchange Tower (disposed in 4Q16).

Dividend of 18 S cents/share announced

  • Dividend of 18 S cents/share announced, including a special final dividend of 6.0 S cents (2016: 16 S cents). This translates into dividend yield of 1.4% and payout ratio of 31%.



STOCK IMPACT


Riding on strong residential sales momentum. 

  • CDL sold over 1,171 units with S$1.93b (55% y-o-y), and has over 2,750 units in the pipeline. The group’s projects continued to do well, with Phase One and Two of Gramercy Park 100% and 93% sold respectively, achieving ASP of around S$2,800psf. 
  • Private preview of 124-unit New Futura saw 48 units sold at ASP of S$3,200 psf. Upcoming launches include The Tapestry (Mar 18), South Beach Residences (2Q18) and West Coast Vale site (4Q18).

Optimistic outlook on Singapore residential. 

  • Management guided that the Singapore residential market recovery is unlikely to be derailed by the 1% marginal Buyers Stamp Duty increase on properties above S$1m, as the tax was meant to be progressive and not as a cooling measure. 
  • Management sees a muted effect on the mass-market segment, while expecting discerning buyers in luxury developments to see the strong potential of property investment in Singapore compared to other global cities like Hong Kong where prices have increased significantly. 
  • The land bids tendered by CDL in the past year also suggests it is expecting over 10% appreciation in residential prices on average.

Aspirations to build a US$5b AUM fund management platform by 2023, led by former AXA veteran Frank Khoo. 

  • As the new CIO, Frank Khoo brings over 20 years of international experience in fund management, private equity, acquisition of real estate assets and the repositioning and restructuring of real estate businesses across Asia and Europe. At his previous organisation, Mr Khoo also built the Asian business from scratch to reach an AUM of US$10b. The team is still growing, and aims to add one head count for every US$100m AUM. By 2019, the group aims to launch its first series of close-ended, co-mingled funds, focusing on core/core-plus, and opportunistic real estate investments in Asia Pacific.
  • The core and core-plus funds target to provide stable and constant income stream (with less reliance on capital appreciation), looking at assets such as Republic Plaza and 7&9 Tampines Grande. 
  • For value-added funds, the focus is on higher risk-return projects, such as through JVs, and club deals initiatives on bigger development projects. 
  • Not only will the platform allow CityDev to play on both the listed and unlisted sides of the real estate industry (a total market of US$13.5t), it also creates a stable income stream, greater access to capital and diversifies its customer base to include institutional investors.

Singapore office outlook has improved. 

  • 4Q17 rents rose 2.6% q-o-q in 4Q17 (carrying on from the momentum in 3Q17), after nine consecutive quarters of decline. Management noted that office development activity has also increased, and sees strong participation and competitive bids for a vacant site under the GLS programme. 
  • For 2017, the group's office occupancy rate was 94.8%, vs 87.4% for the market.

Appetite for more M&As to grow recurring EBITA to 65% (vs 56% currently).

  • Management said they will be disciplined in M&A execution to acquire assets mainly in the hotel and office segments, to support this goal. Other than its cash hoard of around S$4b, management also guided they have many untapped facilities, and could gear up to a still healthy level of 0.3-0.4x.

Overseas projects update. 

  • Management noted near-term prospects in the UK are clouded by uncertainties surrounding Brexit, prospects of increased interest rates to curb inflation and the high stamp duty land tax (SDLT). The 28,000sf Development House at 56-64 Leonard Street, Shoreditch, continues to be fully leased, with vacant possession now expected from 3Q18; the decision on the application for redevelopment is expected to be made in 2018. 
  • In China, Hongqiao Royal Lake has sold 38 of the 85 villas to-date, but given that villa developments are no longer permitted in China, management believes this property will have greater upside in the future. The Hong Leong Plaza Hongqiao has also completed construction in 4Q17, and is expected to contribute to recurring income streams in early-19. 
  • For Japan, Park Court Aoyama The Tower has been 80% sold, and expects to be completed in Mar 18.



VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$14.03, pegged at parity to our RNAV estimate of S$14.03/share.


SHARE PRICE CATALYST

  • Relaxation of property measures in Singapore and substantial overseas acquisitions.






Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2018-03-01
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.030 Same 14.030



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