City Developments - RHB Invest 2019-08-13: Transformation In Progress


City Developments - Transformation In Progress

  • Stay NEUTRAL and SGD9.20 Target Price, 2% upside plus 2.2% yield.
  • CITY DEVELOPMENTS LIMITED (SGX:C09)'s 2Q results were broadly in line, excluding one-off gains.
  • Key positives: Healthy sales at City Developments’ high-end residential launches and a revised privatisation offer for its subsidiary, which is likely to gain minority approval. Yet, headwinds persist across City Developments’ core operating markets in terms of high residential supply, Brexit uncertainty, and a slowing macro economy.
  • While valuations are attractive – City Developments share price at a 42% discount to RNAV – it lacks clear catalysts.

Positive response for high-end new launches.

  • Despite a challenging market, City Developments’ Singaporean high-end new launches – Boulevard 88, Amber Park, and South Beach Residences – saw healthy take-ups, supported by a pick-up in foreign buying activity. It sold 515 units in 1H19 (1H18: 658) with a higher total sales value of SGD1.6bn (1H18: SGD1.3bn).
  • Management guidance: Margins for high-end launches are likely to be slightly higher than 20% (50%-plus for legacy landbank) and low-teens for recently-acquired sites.
  • Looking ahead, the group is expected to launch its 680-unit Sengkang Grand Residences JV project in 4Q19, for which we expect a favourable response due to its attractive location and mixed-use facilities.

Fund management business gaining traction.

  • City Developments announced the partial unwinding of its Profit Participation Securities (PPS) 1 structure by acquiring the hotel and retail component at W Singapore-Sentosa Cove and Quayside Isle, valuing it at SGD393m. The residential component is expected to be refinanced to extend the sales timeframe.
  • PPS2 has been successfully unwound with a SGD154m pre-tax gain.
  • City Developments also sold 18 of 30 launched units in Nouvel 18 (PPS3) at > SGD3,330psf.
  • Separately, it acquired a 50% manager stake and 12.4% holding in SGX-listed IREIT GLOBAL (SGX:UD1U) for SGD77m.

Revised Millennium & Copthorne Hotels (M&C) offer likely to gain acceptance.

  • City Developments launched a revised takeover offer in June for its M&C subsidiary, valuing it at GBP2.2bn (SGD3.9bn), a P/BV of 0.82x, or c.13x FY18 EV/EBITDA. The offer is currently awaiting regulatory approvals. City Developments also received irrevocable undertakings representing 43.5% of shares it currently does not own – it only needs 6.5% more acceptance to clear the hurdle.
  • This move is long-term positive and will help the group to better reposition its ageing hotel assets. However, it will result in significant increases in near-term capex.

Diversifying market presence.

  • City Developments has entered into an agreement with ASX-listed Abacus Property to acquire three mixed development projects in Brisbane and Melbourne for AUD25.9m (SGD25m).
  • In China, City Developments raised its stake in Shanghai Hongqiao Sincere Centre to 100% from 70% for a total purchase price of CNY1.75bn (SGD334m).
  • In Japan City Developments acquired the 34-unit Horie Lux residential project in Osaka for JPY2bn (c.SGD25m), targeting the rental market with an entry yield of 4.5% pa.
  • Upside/downside risks: relaxation of cooling measures, continued slowdown l sales and prices.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-13
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