City Developments - RHB Invest 2018-03-20: Riding On The Residential Segment’s Recovery

City Developments - RHB Invest 2018-03-20: Riding On The Residential Segment’s Recovery CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Riding On The Residential Segment’s Recovery

  • We resume coverage on City Developments (CDL) with an upgrade to BUY call (from Take Profit) and a revised Target Price of SGD 15.00 (from SGD11.30, 13% upside). 
  • As one of the largest residential landbank owners in Singapore, it remains the best proxy for investors looking to tap into the residential segment’s recovery. Its listed subsidiary Millennium & Copthorne Hotels (M&C)’s hotel operations are also poised to benefit from strong global economic growth aiding the hospitality sector.
  • The renewed focus on its fund management platform would help boost recurring income and ROEs. With its net gearing at a historical low, CDL has a strong war chest of > SGD5bn for acquisition opportunities.

Holds one of the largest residential landbanks in Singapore. 

  • City Developments (CDL) current unsold inventory of ~3,859 units makes it one of the developers with the highest unsold units. While it has been fairly aggressive in recent land bids, we believe its strong brand positioning and established track record should aid in its projects commanding premium prices.
  • Our channel checks revealed that its recent preview of The Tapestry drew a strong response with > 5,000 people visiting the show units during the launch on 10 Mar. We understand that launch prices are expected to be around SGD 1,300psf, which translates into a healthy margin of > 20%.

Fund management – the next key growth driver. 

  • City Developments (CDL) targets to achieve assets under management (AUM) of USD5bn under its fund management platform by 2023. Notably, this AUM target does not include its existing profit participation securities (PPS) and REIT platforms but mainly consist of capital from third parties. It recently appointed a new CIO, Mr Frank Khoo, who will be in charge of growing the fund management business. 
  • Based on our rough estimate, this business, once established, could significantly boost the company’s recurring income fees by ~ SGD50m pa (~9% of FY17’s net profit).

Brighter prospects for M&C despite failed privatisation bid. 

  • The outlook for Millennium & Copthorne Hotels (M&C), CDL’s 65%-owned listed subsidiary, is positive with strong global economic growth providing tailwinds for the hospitality sector. M&C plans to allocate a significant amount for capex to its existing hotels for product improvement and maintenance. 
  • While CDL did not succeed in its recent privatisation bid, management remains optimistic on its prospects and would look at increasing its stake, if the right opportunity arises.

Good headroom for acquisition-led growth. 

  • Net gearing (excluding revaluation surplus) is currently at a historical low of 9%, although it is expected to notch up to mid-teens post recent acquisitions. This presents CDL with a debt headroom of > SGD5bn for acquisitions. 
  • Management noted that Singapore would remain a key focus market for acquisitions in the near future.

Upgrade to BUY. 

  • We raise our RNAV estimates to SGD16.69 (from SGD14.12) by marking to market its listed M&C portfolio and including contributions from its recently-acquired assets in Singapore and overseas. We also narrow our RNAV discount to 10% from 20% with the Singapore residential property sector at the early stages of a recovery. 
  • Key catalysts are stronger-than-expected rebound in Singapore residential property prices, and yield-accretive and sizeable M&A transactions. 
  • A key risk is the introduction of additional property cooling measures.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-03-20
RHB Invest SGX Stock Analyst Report BUY Upgrade TAKE PROFIT 15.00 Up 11.300