City Developments (CDL) - RHB Invest 2018-07-23: High Exposure To SG Residential Market

City Developments - RHB Securities Research 2018-07-23: High Exposure To Sg Residential Market CITY DEVELOPMENTS LIMITED SGX:C09

City Developments (CDL) - High Exposure To SG Residential Market

  • Downgrade to NEUTRAL from Buy, with new SGD10.40 Target Price from SGD15.00, offering 3% upside.
  • We expect CDL to be negatively impacted by the slowdown in demand for Singapore’s residential properties due to recent cooling measures. It has among the largest inventory of > 3,000 residential units in Singapore.
  • The near-term outlook for UK projects also remains subdued from slow progress of Brexit negotiations. Key re-rating catalysts are rapid build-up in scale at fund management platform and strong recovery at hotel operations.

Policy measures to impact selling prices and demand for upcoming launches.

  • From our latest estimates, City Developments has unsold residential inventory in Singapore of ~3,300 units, with Singapore residential segment accounting for ~25% of our RNAV estimate.
  • We expect the latest round of property cooling measures to adversely impact margins at its developments, and have trimmed our selling price assumptions by 5-10%. Projects likely to see maximum impact are Amber Park en bloc, Handy Road, West Coast Vale site and Sumang Walk executive condominium (EC) – these were purchased at higher prices, compared to neighbouring sites in anticipation of a recovery.

Diversified regional and sector presence should mitigate some of the impact.

  • As at 1Q18, Singapore accounted for 51% of assets and 62% of revenue. Other key markets include UK (12% of assets), China (10%) and the US (8%). While management has been actively trying to diversify geographical presence, Singapore remains the core investment market. As such, we believe the latest policy measures will cool investors’ sentiment towards the stock.

Outlook for hotel segment remains positive.

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

Low gearing but limited opportunities for sizeable capital deployment.

  • Net gearing (excluding revaluation surplus) is at a historical low of 10%. The healthy balance sheet shields it from any adverse impact from rising interest rates and gives ample debt headroom of > SGD5bn for acquisitions. However, with policy tightening and challenging market conditions for acquisitions in its core markets, we see limited opportunities to deploy sizeable capital at the moment.

Cut to NEUTRAL with new SGD10.40 Target Price.

  • We have lowered our RNAV to SGD16 from SGD16.69, after lowering our price assumptions for Singapore projects and mark-to-market listed M&C portfolio. We also raised our RNAV discount to 35% from 10%, as we expect sentiment towards the Singapore residential property market to be negatively impacted.
  • Key catalyst is accretive and sizeable M&A. Key risks is introduction of additional property cooling measures.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-07-23
SGX Stock Analyst Report NEUTRAL Downgrade BUY 10.40 Down 15.000