City Developments - CGS-CIMB 2018-05-11: Drag From Residential Operations

City Developments - CGS-CIMB 2018-05-11: Drag From Residential Operations CITY DEVELOPMENTS LIMITED SGX: C09

City Developments - Drag From Residential Operations

  • City Developments's 1Q18 net profit of S$80m was below our expectations, at 14% of our FY18 forecast.
  • The drag on bottomline was due to lower residential margins in 1Q.
  • Office portfolio continues to be well occupied, capitalising on office recovery post AEI.
  • Hotel operations expected to deliver modest showing in the near term.
  • Maintain ADD. Our target price is tweaked slightly to S$13.41.

1Q18 results highlights

  • City Developments reported 1Q18 revenue of S$1.06bn, up 35% y-o-y, in line with our projections. However, net profit was below our forecast, at S$80m (-19% y-o-y) due to lower GP margin on recognition of contributions from the lower-margin Executive Condominium project completion and higher effective tax rate. 
  • This was partly offset by one-off gains rom CDLHT’s sale of the Mercure Brisbane and Ibis Brisbane.

Margin drag from lower-margin EC project recognition

  • Despite an 88% jump in 1Q residential revenue, PBT fell 12% y-o-y to S$80.8m due to recognition of the lower-margin The Criterion EC (99% sold), completed in 1Q. There were maiden profits from New Futura (50% sold, ASP S$3,350 psf). Gramercy Park is 98% sold and newly-launched 861-unit The Tapestry is 46% taken up. 
  • All in, City Developments sold 459 units valued at S$793m in 1Q18. It plans to launch 1,074 of its 3,000-unit pipeline in 2018, including South Beach Residences, former Boulevard Hotel and West Coast Vale.

High office occupancy, leveraged to the office cycle recovery

  • City Developments’ office portfolio remains well occupied at 92.7% at end-1Q18. It has 28.7% of NLA to be renewed for the rest of 2018 and 30.4% in 2019. This will enable the group to leverage on the office leasing market recovery. 
  • Meanwhile, the S$70m asset enhancement initiative (AEI) works at Republic Plaza, including creating a new retail cluster, is scheduled to commence in Apr 18 and complete by 2H19. Co-working space operator, Distrii is expected to soft-open in May and fully take up its 62,000 sq ft by 3Q18.

Stable hotel operations

  • Hotel operations, through M&C, reported a higher PBT thanks to disposal gain from the sale of the two Australian hotels by CDLHT as well as higher contributions from the REIT. 
  • In terms of hotel operations, 1Q performance was mixed with most markets performing weaker with the exception of Asia and New Zealand. The group will continue to focus on repositioning its hotel portfolio and improving returns from its assets as well as be alert on acquisition opportunities.

Maintain ADD

  • We leave our FY18-20 earnings estimates unchanged post 1Q results. However our RNAV is tweaked marginally down by 0.2% as we update for M&C and CDLHT’s latest balance sheets. Hence, our target price is adjusted to S$13.41, still pegged at a 20% discount to RNAV. 
  • In terms of re-rating catalysts, City Developments has a low net debt to equity ratio of 0.1x and is well positioned to deploy balance sheet capacity into new investment opportunities. 
  • Downside risks include slower-than-expected deployment of capital.

LOCK Mun Yee CGS-CIMB | https://research.itradecimb.com/ 2018-05-11
SGX Stock Analyst Report ADD Maintain ADD 13.41 Down 13.440