City Developments Limited - Phillip Securities 2019-02-22: Still Resilient In Face Of Adversity


City Developments Limited - Still Resilient In Face Of Adversity

  • CITY DEVELOPMENTS LIMITED (SGX:C09)’s 4Q18 and FY18 PATMI below our expectations, mainly due to impairment losses recorded.
  • Dividend of 20.0 cents per share for FY18 (FY17: 18.0 cents) was declared (including a 6.0 cent special interim dividend that was paid out in Sep 2018).
  • Robust demand for launched Singapore projects – including those launched after July 2018.
  • Steadily ramping up recurring income stream with addition of two London commercial buildings, ongoing AEI at Republic Plaza, and other potential AEI targets.
  • Sizeable impairment losses recorded on back of U.S. hotels dragged 4Q18 PATMI down by 64%. Excluding this, and on a like-for-like basis, 4Q18 PATMI would have increased 17% y-o-y.
  • Maintain ACCUMULATE with adjusted Target Price of S$11.82 (change of analyst).

Results at a glance

  • City Developments’ 4Q18 Gross revenue S$788.3m (-40.6% y-o-y): Lower revenue due to full recognition of revenue and profit from The Brownstone EC which obtained its TOP in Oct 2017, and gain from partial divestment of interest in two Chongqing projects in 2017.
  • City Developments’ 4Q18 Gross profit S$436.6m (-7.4% y-o-y).
  • City Developments’ 4Q18 PATMI S$72.8m (-64% y-o-y): PATMI increased 17%, when excluding the S$94.1mn impairment losses for hotels, S$20.1mn allowance for foreseeable losses for the two small-scale Central London development projects, and a gain from the partial divestment of interest in two Chongqing projects in Chongqing in 2017.

The Positives

 Robust demand for launched projects – including those launched after July 2018 cooling measures.

  • The property development segment was the clear outperformer in FY2018. Keeping in mind its non-recurring nature, this segment has traditionally reported similar revenue to the hotel operations segment. Total sales value rose 14% y-o-y despite a 5% y-o-y lower number of units sold, and this is largely owed to New Futura (c.93% sold) – which carried a record price tag of c.S$3,500psf, with S$4,009psf being the highest price transacted for a non-penthouse unit to date.
  • In addition, projects such as Whistler Grand (S$1,380psf, 716 units) and South Beach Residences (S$3450psf, 190 units) were able to achieve a total take-up rate of c.36% and c.28% despite being launched after July 2018.

 Steadily ramping up recurring income stream.

  • The acquisition of the two prime Grade A freehold commercial buildings in London (Aldgate House and 125 Old Broad Street) is in line with the Group’s strategy of achieving an AUM of S$5bn by 2023 and expanding its recurring income stream to S$900mn by 2028. These two properties are currently under-rented and have an upside of up to c.27% - particularly for the latter property, of which has 24% of its leases up for expiry this year, of which half have already been committed to higher rental levels.
  • In addition, its Yaojiang International property in China had begun its master lease agreement with Distrii (which City Developments has a 24% stake in) in Nov 2018.

The Negatives

 Sizeable impairment losses on back of U.S. hotels.

  • S$94.1mn of impairment losses were recorded in 4Q18, mainly on the back of its U.S. hotels (stemming from an industry-wide challenge on the operating cost structure). This – in addition to the S$20.1 million allowance for foreseeable losses for two small-scale Central London development projects which may potentially be leased out and the loss of revenue from the temporary full closure of the Millennium Hotel London Mayfair in July 2018 – dragged PATMI down by 64% in 4Q18.
  • Excluding these factors and the FY17 gains from the partial divestment of two Chongqing projects, 4Q18 PATMI would have increased 17% y-o-y.


  • While City Developments’ share price - along with most Singapore property developers’ - took a beating post July 2018 cooling measures, net buys have since flowed back into the counter, and it has to-date recovered to c.85% of where it stood immediately before the cooling measures were announced.
  • With City Developments largely being in the Singapore residential segment, its earnings drivers substantially weigh on the sales efficacy of its five launches this year.
  • Sumang Walk is the only executive condominium launch of the year and is expected to receive healthy interest – already getting requests to be placed on the site’s waiting list. Another site – Boulevard 88 in district 10 – had also already received informal interest for one of its highest-priced units. City Developments is confident of achieving still-healthy margins given its successful land banking efforts earlier on in the cycle.
  • Going forward, the Management communicated that the strategy is to grow organically – with the possibility of asset-transfer into a fund as seed assets, as well as inorganically – via listed and unlisted real estate platforms. The recurring income segment and fund management platform will thus increasingly be the main areas of focus for City Developments, such that the Group’s topline can be bolstered by a steady stream of income.
  • City Developments had previously announced its intention to unwind its three existing profit participation securities (PPS), having already divested Manulife Centre (under PPS2) in Jan 2019. City Developments is also in discussions with Blackstone to extend the fund life for PPS 1, particularly for the W Residences.
  • Asset enhancement initiatives (AEIs) are underway for its flagship office building, Republic Plaza, which is slated to complete in 2H19. Other potential AEI targets are the Fuji Xerox Towers (Singapore), City Industrial Building (Singapore), Jungceylon Mall (Phuket, Thailand), and Aldgate House (London, UK).
  • On property development, City Developments is focused on clearing its already-low Singapore inventory while also keeping an eye on any attractive government land sales sites (more so than en-bloc sites). The Management opined that, barring any geopolitical shocks, property prices should stabilise in the near term, given the pent-up demand and demand from cash-rich en-bloc sellers.

Maintain ACCUMULATE with adjusted Target Price of S$11.82 (prev S$13.40).

  • Our RNAV-derived target price represents 1.0x FY19e P/NAV.
  • Adjustment to target price was mainly to account for a different set of assumptions, including the discount used against the revalued net asset value (RNAV), following a change of analyst.

Tara WONG Phillip Securities Research | https://www.stocksbnb.com/ 2019-02-22