City Developments - DBS Research 2019-08-13: Strong Notable Comeback

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CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - Strong Notable Comeback

• CITY DEVELOPMENTS LIMITED (SGX:C09)'s 1H19 net profit rose 18% y-o-y led by divestment gains.
• 26% sales take-up rates for four new private residential projects; luxury property sales stayed buoyant.
• c.S$3.4bn strategic investments (incl. Sincere and M&C takeover offer) YTD to build development pipeline and recurring income portfolio.
• Upgrade to BUY; raise Target Price to S$11.00.

Upgrade to BUY; raise Target Price to S$11.00.

• We upgrade our rating on CITY DEVELOPMENTS LIMITED (SGX:C09) to BUY and raise our Target Price to S$11.00.
• We believe City Dev’s share price could trade up to the higher end of the trading range (FY13-FY17), given the positive catalysts of
  1. potential successful privatisation of M&C at below book value,
  2. investments and redevelopment potential to build its recurring income, and
  3. better-than-expected sell-through rates especially in the luxury market.

Where we differ:

• Better-than-expected sell-through rates despite the weak sentiment. Contrary to market expectations, City Developments has successfully achieved better-than-expected sell-through rates especially in the luxury market, despite the weak market sentiment.

Potential catalyst:

• Property sales remain strong despite the change in sentiment; growth in recurring income.

WHAT’S NEW - Strong notable comeback

1H19 results remain strong, supported by divestment gains

• City Developments’s 1H19 net profit grew 18% y-o-y to S$362m largely due to divestment gains of assets from PPS2 (Manulife Centre and 7&9 Tampines Grande) amounting to S$154m ($43m based on City Developments’s stake).
• Excluding divestment gains, PBT fell 13% y-o-y mainly on lower contributions from property development (PBT -47% y-o-y) due to the timing of profit recognition and hotel operations (PBT -48% y-o-y) being impacted by the closure of hotels for refurbishments.
• 2Q19 net profit fell 26% y-o-y to S$162m mainly due to lower contributions from property development (PBT – 63% y-o-y) attributable to the timing of profit recognition for development properties and hotel segment (PBT -12% y-o-y).
• Property division 1H19 revenue and PBT fell 65% y-o-y and 63% y-o-y, respectively, mainly due to the absence of lump sum recognition in 1H18 including
  1. The Criterion EC upon completion in Feb 2018,
  2. New Futura and Gramercy Park which was completed, and
  3. overseas projects such as HLCC and Park Court Aoyama.
• Property division PBT margins have expanded to 35% vs 26% in 1H18 as a result of a lower margin project from The Criterian EC. 2Q19 PBT margins expanded marginally to 35% vs 33% in 2Q18.
• Hotel operations 1H19 revenue and PBT fell 2% y-o-y and 48% y-o-y, respectively, impacted by hotels closed for refurbishment / rebranding exercise and lower residential sales in New Zealand.
• Rental properties 1H19 revenue rose 23% y-o-y mainly led by full quarter contributions from three buildings acquired in 1H18, namely Aldgate House (London), 125 Old Broad Street (London) and Central Mall Office Tower. PBT stood at S$258m in 1H19 vs S$87m in 1H18, supported by higher divestment gains.
• Declared interim dividend of 6 Scents per share (flat y-o-y). See City Developments dividend history.
• YTD, City Developments has invested approximately S$587m in strategic acquisitions to build development pipeline and recurring income portfolio. Including investments into Sincere and M&C takeover offer, we estimate that City Developments would have made c.S$3.4bn worth of strategic investments.

Outlook

Residential – Singapore sales volume fell 22% y-o-y to 505 units but sales value rose 21% y-o-y; achieved overall sales take-up rate of 26%

• 1H19 property sales volume in Singapore slid 22% y-o-y to 505 units while sales value rose 21% y-o-y to S$1.6bn due to higher ASP (S$2.6k psf vs S$2.1k psf in 1H18) from the launch of higher-end properties such as Boulevard 88 and Amber Park.
• In 1H19, City Developments launched Boulevard 88 and Amber Park with 69 units (45%) sold at ASP of more than S$3.8k psf and 166 units (28%) at ASP of S$2.5k psf respectively.
• In Jun/Jul 2019, City Developments launched another three projects, namely Haus on Handy (sold 13%), Piermont Grand EC (sold 46%) and relaunched Nouvel 18 (sold 12%)
• Based on the four new private residential launches YTD, the overall sales take-up rate is 26% of total units, a commendable sales volume given the current weak sentiment.
• Total launch pipeline stood at 1,240 units with the upcoming launch of Sengkang Central (680 units) expected in 4Q19. Its latest landbank at Sims Drive is expected to launch in 1Q20.

Commercial properties – remains stable; official launch of the new Republic Plaza next month

• In Singapore, its office and retail properties remain stable with occupancies of 92.1% and 95.1% respectively. The official launch of Republic Plaza is expected to be held in Sep 2019 and could ride on the rising office rents when the asset-enhancement initiative (AEI) completes.
• In China, one of the five towers (20% of total NLA), has been leased to a serviced apartment operator commencing in 4Q19. The HLCC mall has achieved 87% occupancy while the hotel is expected to open by 3Q20.

Hotel – tie-up with Hilton to manage some M&C Hotels.

• M&C’s RevPAR rose 3.4%. On constant currency basis, the group’s RevPAR increased 0.2% y-o-y and like-for-like basis was -0.3% y-o-y. On a constant currency basis, RevPAR were still impacted by the US (-0.7%) and Asia (-1.5%).
• The hotel segment was impacted by the closure of Millennium Hotel London Mayfair (pending its re-opening in Sep 2019) for refurbishment and refurbishment works at Orchard Hotel Singapore, and lower residential section sales in New Zealand.
• The new Mayfair Hotel will be initially managed by Hilton under its LXR Hotels & Resorts brand – its first in Europe, with 257 luxurious guestrooms and 51 designer suites. It will also have a prestigious new London restaurant led by celebrity chef Jason Atherton.
• Management is currently awaiting approvals from New Zealand authorities to proceed with the takeover offer of 685 pence for all remaining M&C shares. Management expects the approvals to be obtained within the next couple of weeks.
• We believe management has plans to revamp M&C’s portfolio of hotels including potential tie-ups with Hilton to manage (such as the Mayfair Hotel) or affiliation with the Hilton Hotel (such as Millennium Times Square New York) to upscale the M&C portfolio.

Fund management – acquired W Singapore from PPS1; relaunched Nouvel 18 from PPS3.

• In 2Q19, in connection with the non-residential components of PPS1 (W Singapore – Sentosa Cove and Quayside Isle) valued at S$393m, the group acquired the remaining instruments from the PPS1 investors.
• PPS2 has been unwound.
• PPS3 – soft re-launch of Nouvel 18 on 18 July 2019 at ASP of > S$3k psf. Sold 12% of total units.

Upgrade to BUY; raise Target Price to S$11.00 from S$9.50

• We upgrade to BUY rating and raise our Target Price to S$11.00 from S$9.50 previously.
• The target price is based on a lower 30% (vs 40% previously) discount to RNAV. We have also factored in the uplift in RNAV with the privatisation of M&C and M&C valued at book value.
• City Developments is currently trading at 0.8x FY19F P/NAV, at close to 1SD below the historical average traded during the last property cycle (FY13-17). We believe City Dev’s share price could trade up to the higher end of the trading range, given the positive catalysts of
  1. potential successful privatisation of M&C at below book value that adds to City Developments’s value when completed,
  2. investments and redevelopment potential to build its recurring income, and
  3. better-than-expected sell-through rates especially in the luxury market despite the weak market sentiment, such as South Beach Residences and Boulevard 88.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-08-13

SGX Stock Analyst Report BUY UPGRADE HOLD 10.00 UP 9.500