City Developments (CIT SP) - UOB Kay Hian 2018-05-14: 1Q18 Riding On Singapore Residential And Office Recovery

City Developments (CIT SP) - UOB Kay Hian 2018-05-14: 1q18: Riding On Singapore Residential And Office Recovery CITY DEVELOPMENTS LIMITED SGX: C09

City Developments (CIT SP) - 1Q18: Riding On Singapore Residential And Office Recovery

  • While results were below expectations, we expect a better second half.
  • Management expects the residential recovery to be strong with sales volume increasing in subsequent quarters and housing prices to rise, on the back of pent-up demand and increased land costs.
  • City Developments (CDL) is embarking on rejuvenating Republic Plaza to benefit from the recovery in the office space. Management intends to grow its fund management business, by acquiring existing platform with established teams.
  • Maintain BUY with an unchanged target price of S$14.03.



RESULTS

  • Results below expectations. City Developments (CDL) reported a 1Q18 PATMI of S$80.0m, down 16.3% y-o-y, mainly due to compressed profit margins for The Criterion EC relative to higher profit margin projects completed last year, and absence of contribution from Commonwealth Towers. The results came in below our expectations, at 14% of our full-year forecast, on lower-than-expected earnings contribution from property development due to timing of profit recognition. We expect higher earnings recognition in the second half.
  • Segmental performance. 1Q18 property development PBT was down 12.2% y-o-y due to compressed profit margins from The Criterion EC (relative to high margin projects such as Coco Palms and D’Nest) and absence of share of contribution from Commonwealth Towers, coupled with lower share of profit from First Sponsor Group Limited (an associate of M&C) following fewer handover of residential units in the Millennium Waterfront project. 1Q18 saw hotel operations PBT increase, in line with higher hotel income and improved performance from JW Marriot Hotel Singapore South Beach (JV). 
  • During the quarter, rental property PBT grew by 115%, due to a S$29m gain recognised on divestment of Mercure Brisbane and Ibis Brisbane in Jan 2018 by CDLHT, as well as the absence of an exchange loss (recognized by CDLHT mainly from repayment of loans in 1Q17).


STOCK IMPACT

  • Strong residential sales momentum. CDL sold over 459 units with S$792.6m (+66% y-o-y), and has over 3,000 units in the pipeline. The group’s two launched projects in 2018 did well; Phase One of New Futura achieved 97% sales (62 out of 64 units) and ASP over S$3,350 psf and Phase One of The Tapestry achieved 80% sales (400 out of 500 units) and ASP of S$1,360 psf (ie a new benchmark price in the vicinity).
  • Positive outlook on Singapore residential. Management expects the residential recovery to be strong; with sales volume increasing in subsequent quarters and housing prices to rise, on the back of pent-up demand and increased land costs.
  • CDL has accumulated one of the largest land banks (3,181 attributable units) for future development income, comprising 261 attributable units in launched projects and another 2,920 attributable units in the launch pipeline. The projects in the launch pipeline include The Tapestry (est Mar 2018, 500 of 861 units were released), South Beach Residences (est. 3Q18), West Coast Vale (est. 4Q18), Former Boulevard Hotel site (est. 2H18), Amber Park (est. 1H19), Handy Park (est. 1Q19), and Sumang Walk (est. 2Q19). Management is timing their launch for the appropriate parcel; and is well positioned to ride on the residential recovery.
  • Singapore office segment to improve. According to CBRE data, Grade A monthly office market rent increased (3.2% q-o-q, 8.4% y-o-y) to S$9.70 psf in 1Q18. Landlords in the CBD have been increasing rents, and scaling back on their incentives. Going forward, management expects office rents to continue the upward trend, as office supply tapers over the next few years amid the positive economic outlook.
  • CDL expects its flagship Republic Plaza, which has started on an S$70m AEI (and expected to complete by 2H19) to benefit from the rising office rents. The AEI works include makeovers of the lobby, lift lobbies, lift modernisation, office space enhancements, M&E infrastructure, and inclusion of new retail cluster on Level 2 etc. CDL and its JV partner, Alpha Investment Partners, are also putting Manulife Centre 7 & 9 Tampines Grande for sale through separate EOI processes, in view of the favorable office market.
  • Fund management growth ambitions. Management alluded that they see potential in growing their fund management business, on the back of Singapore’s status as a gateway city to Asia, increasing institutional interest in Asian real estate assets, as well as their strong positioning as one of Singapore’s largest developers and landlords. As part of the growth initiatives, management plans on acquiring existing platforms that come with established teams with good track record.
  • UK update. CDL’s Teddington Riverside 240-unit development is on track for completion in 1Q20, while the landscaping and showflat for its first block (Carlton House) will also be completed by October this year for the main launch. CDL has also contracted demolition works at the Ransomes Wharf site in Battersea (which is scheduled to complete by 4Q18).
  • Expect more property acquisitions and investments in China. CDL remains positive about China’s 2018 outlook, given the political stability. The group’s Hongqiao Royal Lake has sold 40 out of the 85 villas, and may retain some units for long-term investment, due to the scarcity and demand in Shanghai. The Hong Leong Plaza Hongqiao is expected to obtain legal completion certificate in 2Q18, and will be held for long term rental income and capital appreciation (ie due to improved accessibility from the Hongqiao Transportation Hub in Shanghai).
  • Looking at further exposure in Australia. CDL continues to be upbeat about Australia, given its strong economic fundamentals and stable population growth. The group’s JV 476-unit residential project in Brisbane, Ivy, and Eve has sold 97%, with only 13 apartments remaining.


VALUATION/RECOMMENDATION

  • Maintain BUY with an unchanged target price of S$14.03 pegged at parity to our RNAV of S$14.03/share.


SHARE PRICE CATALYST

  • New benchmark prices at project launches in Singapore and substantial overseas isitions.





Vikrant Pandey UOB Kay Hian | Peihao Loke UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-14
SGX Stock Analyst Report BUY Maintain BUY 14.030 Same 14.030



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