City Developments - UOB Kay Hian 2018-08-10: 2Q18 Good Showing But More Cautious Outlook Ahead

City Developments (CIT SP) - UOB Kay Hian Research 2018-08-10: 2q18 good Showing But More Cautious Outlook Ahead CITY DEVELOPMENTS LIMITED SGX:C09

City Developments (CIT SP) - 2Q18 Good Showing But More Cautious Outlook Ahead

  • City Developments’ 1H18 results were in line, with net profit of S$285m (+36% y-o-y) underpinned by strong development profits and rental properties, which offset lower contributions from hotels.
  • A key focus will be on building up recurring income with a 10-year EBITDA target of S$900m.
  • Maintain BUY with a lower RNAV-based target price of S$12.00 (previously S$14.03) as we impute a 15% discount to reflect the more challenging outlook in Singapore’s residential property.



RESULTS


Results broadly in line.

  • City Developments (CDL) reported 1H18 net profit of S$284.8m (+36% y-o-y), which came in line with our expectations, accounting for 46% of our full-year estimates. 

~ SGinvestors.io ~ Where SG investors share
  • The solid performance was underpinned by the property and rental properties, which delivered an 87% y-o-y and 53% y-o-y rise in pre-tax profits respectively. However, group performance was slightly dented by lower hotel contributions. Following a solid 1H18 results, management declared a higher special interim dividend of 6.0 S cents/share (4.0 S cents/share in 1H17).

Segmental performance, property shines.

  • City Developments’ 1H18 development pre-tax profits surged 87%, boosted by several projects including New Futura, Gramercy Park and Hong Leong City Centre (HLCC) in Suzhou, China. In addition, revenue was also boosted by the Criterion executive condominium (EC), which achieved temporary occupation permit (TOP) in 1H18. In total, 651 residential units were sold in 1H18, with total sales value of S$1.29b.
  • As for City Developments’ rental properties, the 53% jump in pre-tax contributions was mainly due to the gain of S$29m on the divestment of Mercure Brisbane and IBIS Brisbane in January 2018. 
  • Lastly, City Developments’ hotel operations suffered a 23% y-o-y fall in pre-tax profits due to a combination of weaker demand in UK, the refurbishment of Millennium Hotel London Mayfair as well as a one-off item in 1H17 (S$22m writeback of impairment of loan). Excluding the impairment, the pretax profits from hotel operations were relatively flat.


STOCK IMPACT


Cautious outlook on Singapore residential.

  • Management is cautious on the outlook for Singapore residential properties after the recent cooling measures. However, City Developments should be well-positioned to navigate the challenging conditions given its strong balance sheet, low unsold inventory (578 units) and affordable launch pipeline. 
  • City Developments has a residential launch pipeline of over 2,600 units and 58% this in the EC and mass market segments, which primarily targets HDB upgraders and first-time buyers. 
  • Upcoming launches to watch out for include Whistler Grand (West Coast Vale) in 4Q18, Amber Park in 1H19, Handy Road in 1Q19, and Sumang Walk (EC) in 2Q19.

Singapore office a bright spot.

  • The Republic Plaza‘s S$70m asset enhancement initiatives (AEI) is expected to complete by 2H19 and will benefit from rising office rents with a total NLA of 785,000 sf after the AEI. The AEI includes makeovers of the lobby, lift lobbies, office space enhancements, M&E infrastructure, and inclusion of new retail cluster on Level 2 etc. 
  • City Development and its JV partner, Alpha Investment Partners, have also put Manulife Centre 7 & 9 Tampines Grande for sale through separate EOI processes, in view of the favourable office market.

Exploring more opportunities in Australia.

  • City Developments 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 been substantially sold.

UK update.

  • City Developments’ 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. City Developments has also contracted demolition works at the Ransomes Wharf site in Battersea (which is scheduled to complete by 4Q18). 
  • We understand City Developments has secured planning approvals for developments at Pavilion Road, Knightbridge and Development House, Shoreditch.

Targeting S$900m in recurring EBITDA in 10 years.

  • This will be through acquisitions or organic growth. We understand the group is in advance negotiation to acquire over S$300m in the office segment in City Developments’ target market. 
  • Over the next 10 years, CDL’s target is to achieve a recurring EBITDA of S$900m (compared to S$290m currently) originating from rental properties, hotel properties as well as fund management fees.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower target price of S$12.00 (previously S$14.03) as we base our target on a 15% discount to our RNAV of S$14.12/share. We believe a discount is warranted given the more challenging outlook for Singapore’s residential property after the recent cooling measures.


SHARE PRICE CATALYST

  • Accretive acquisitions or investments and a continued build-up in recurrent earnings.





Andrew CHOW CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-10
SGX Stock Analyst Report BUY Maintain BUY 12.00 Down 14.030



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