City Developments - DBS Research 2018-07-06: Change In Wind Direction

City Developments - DBS Vickers 2018-07-06: Change In Wind Direction CITY DEVELOPMENTS LIMITED SGX: C09

City Developments - Change In Wind Direction

  • The government surprised the market by hiking ABSD and tightening mortgages, just over a year after measures were relaxed.
  • Buyer sentiment will be impacted.
  • Margins may be impacted if the land was acquired at aggressive prices (likely during late 2017-2018).
  • Downgrade to FULLY VALUED; cut Target Price to S$10.



Downgrade to FULLY VALUED; Target Price cut to S$10.

  • We downgrade our rating on City Developments to FULLY VALUED from BUY and cut our Target Price to S$10.00 (previously S$15.40) by raising our discount to RNAV to 35% from no discount previously.
  • The surprised move by the government in hiking ABSD rates and tightening mortgages (just over a year after the government relaxed measures) will hit buyer sentiment significantly.


Where we differ: Negative sentiment to hit Singapore’s developer with the largest unsold inventory.

  • Given the heightened uncertainty on property sales in the coming quarters coupled with the group having the largest inventory of new units to be launched, City Developments’ share price is likely to be weak in the immediate term. io.
  • In addition, margins of units from the landbank acquired in late 2017 - 2018 could be impacted given that the ability to raise property prices could now be limited following a turn in sentiment.


Potential catalyst:

  • Property sales remain strong despite the change in sentiment; successful launch of its fund management platform.


Valuation:

  • We downgrade the stock to FULLY VALUED (from BUY), and cut Target Price to S$10 from S$15.40, based on 35% discount to RNAV, which implies 0.9x P/NAV.


Key Risks to Our View:


Non-completion of privatisation

  • The inability to complete the privatisation exercise on M&C could limit potential upside to RNAV.


Critical Factors


Upcoming launches could be impacted.

  • City Development had been aggressive in landbanking with over 3k residential units in the pipeline to be launched in 2H2018 to 2019. Upcoming launches such as South Beach Residences, West Coast Vale and the former Boulevard Hotel site will be impacted. 
  • City Developments could delay launches, and adopt a wait and see stance given that it has the firepower to ride out the headwinds. However, margins for projects like Handy Road, Sumang Walk and Amber Park could be affected.

Strong sales momentum seen in existing projects.

  • Residential sales momentum has been strong for the group, achieving 1,171 units with sales value of S$1.93bn. From the group's portfolio of launched projects in Singapore, it has a further 232 unsold inventory on its books (effective stake of 178 units).
  • Based on estimates, the total unsold inventory (launched and unlaunched projects) could be worth up to S$6bn. This will make City Dev the group with the largest share of unsold inventory in the market.

Overseas investments to bear fruit in 2018.

  • In London – City Dev will progressively complete projects at Belgravia and Knightsbridge in 2018 while the Teddington Riverside development is planned for completion by end 2019. Other projects like the Stag Brewery Mortlake site and the recently acquired site at Ransomes Wharf (acquired for GBP58m, GDV of GBP222m) is expected to be launched in the medium term.
  • In China, City Dev will continue to focus on the execution and delivery of Hong Leong City Center. Phase 1 is 86% sold (sales value RMB2.6bn) and phase 2 is 89% sold with sales value of RMB928m adding to the group's earnings visibility and de- risking its exposure in these properties.

Fund management platform

  • The group intends to accelerate its efforts to develop a fund management business to drive recurring income and to achieve a more efficient capital structure and offer recycling opportunities for the group to deploy capital more actively. With three Profit Participation Securities (PPS) already under the fund management platform, the group intends to launch more co-mingled funds or JV, acquire platforms and manage third-party capital.
  • The group aims to build an AUM of US$5bn by 2023.


Balance Sheet:


Undervalued Net Asset Value (NAV).

  • As the group has chosen to account for investment properties on a historical cost basis, its NAV is conservative as we estimate that current fair values of City Dev’s properties are much higher than their carrying values.

Low gearing of 9%.

  • City Dev’s gearing stands at 9% as at FY17. This provides greater financial flexibility and debt headroom for the group to acquire opportunistically.


Share Price Drivers:


If sales volume remains sustainable despite property measures.

  • Following the government implemented property tightening measures, we believe sentiment would impact sales take-up rates on new property launches. However, if sales volume could remain sustaintable (similar to the previous upcycle in 2010 to 2012), this would bode well for City Dev’s new property launches.

Successful launch of its fund management.

  • The group intends to accelerate its efforts to develop a fund management business to drive recurring income and to achieve a more efficient capital structure and offer recycling opportunities for the group to deploy capital more actively. The successful launch of the fund management business will ensure stability of recurring income.


Key Risks:


Decline in residential prices in Singapore.

  • Seen as a proxy to Singapore’s residential market, a worsening of the operating environment is expected to cap any upside potential for the stock. Unsold inventories are mainly in the high-end and executive segments whose unsold stocks typically take time to clear.

Interest rate risk.

  • A rise in interest rates will have a negative impact on property transactions, given lower affordability and thus could adversely affect the group’s outlook.





Rachel TAN DBS Vickers | Derek TAN DBS Vickers | https://www.dbsvickers.com/ 2018-07-06
SGX Stock Analyst Report FULLY VALUED Downgrade BUY 10.00 Down 15.400



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