City Developments Limited - RHB Invest 2018-05-14: Banking On Residential Segment Recovery

City Developments Limited - RHB Invest 2018-05-14: Banking On Residential Segment Recovery CITY DEVELOPMENTS LIMITED SGX: C09

City Developments Limited - Banking On Residential Segment Recovery

  • City Developments (CDL)’s 1Q18 PATMI was lower than consensus and our estimates, due to timing differences in the earnings recognition of its residential projects. 
  • Still, the stock remains one of the better proxies for investors looking to tap into the impending recovery of the residential market, as the developer holds one of the largest residential landbanks in the sector.
  • The outlook for its hospitality segment is also favourable, aided by improving global tourism demand and the growth in corporate travel. Another key growth driver is the expansion of its fund management platform.
  • More acquisitions are expected this year, aided by its lowly-geared balance sheet (debt headroom of over SGD5bn).
  • Maintain BUY, with an unchanged Target Price of SGD15.00 offering an upside of 20%.

1Q18 earnings of SGD80m (-16.3% y-o-y, 14% of FY18F).

  • Revenue rose 35% y-o-y, mainly driven by a lumpy contribution from The Criterion executive condominium (EC), which was completed in 1Q18. The lower earnings were due to lower margins from the EC project. 
  • With the healthy pick-up in sales across its Singapore projects, we expect City Developments’ (CDL) earnings to strengthen in 2H18 and offset the 1Q18 shortfall. It also booked a 1Q18 pre-tax gain of SGD29m from selling Mercure Brisbane and Ibis Brisbane.

Good response to new residential project launches.

  • About 80% of the 500 units launched at The Tapestry have been sold at an ASP of SGD1,360 psf. The selling price indicates a healthy margin of > 25%, based on our estimate. The take-up rate was also strong for its high-end project, New Futura – where 62 of 64 units launched are now sold at an ASP of SGD3,350 psf. 
  • The excellent response for its new launches underscores its strong brand positioning, amid an improving buyer sentiment on the residential market.

Upcoming launches.

  • City Developments is expected to launch Phase 2 of New Futura – the 60-unit North Tower (2Q18), the 190-unit South Beach Residences (3Q18), and its West Coast Vale site in 4Q18. 
  • The Amber Park en bloc site is set to be launched in 1H19.

Divestment of office assets on the cards.

  • The group and its JV partner, Alpha Investment Partners (Alpha), have put Manulife Centre (asking price in excess of SG550m) and 7 & 9 Tampines Grande (asking price in excess of SGD450m) up for sale, through separate expression of interest (EOI) processes. The EOI process for Manulife Centre closed on 9 May, and that for 7 & 9 Tampines Grande will close on 7 Jun. The assets are currently parked under a profit-participation securities (PPS) structure, with Alpha holding the majority 60% stake. 
  • A successful sale of the assets would mark the first unwinding of its PPS scheme.

Ambitious growth plans for fund management platform.

  • City Developments targets to achieve assets under management (AUM) of USD5bn, under its fund management platform by 2023. 
  • It is currently exploring the acquisition of assets in key gateway cities throughout Asia and Europe, with the intention of injecting them into future funds. It may also look at the possibility of acquiring existing platforms that have an established team with a good track record. 
  • When established, the segment could significantly boost recurring income fees by about SGD50m pa (or c.9% FY17’s net profit).

Lowly-geared balance sheet offers room for more acquisitions.

  • The group’s net gearing (excluding revaluation surplus) remains low, at 10%. This presents it with a debt headroom of over SGD5bn for acquisitions. 
  • Singapore and China are expected to be the key focus markets for acquisitions, in the near future.

Maintain BUY

  • Maintain BUY, with our unchanged Target Price of SGD15.00 pegged to a 10% discount to our RNAV estimate of SGD16.69. 
  • Key catalysts are a stronger-than-expected rebound in Singapore residential property prices, and yield-accretive and sizeable M&A transactions.
  • Key risks are the introduction of additional property sector cooling measures and an unexpected slowdown in economic recovery.

Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-14
SGX Stock Analyst Report BUY Maintain BUY 15.000 Same 15.000