City Developments - RHB Invest 2019-11-14: Making Steady Progress


City Developments - Making Steady Progress

  • Maintain NEUTRAL with new Target Price of SGD10.50 from SGD9.20, 0% upside.
  • CITY DEVELOPMENTS (SGX:C09)'s 3Q19 results (excluding impairments) were in line. Key takeaways are the successful privatisation of M&C hotels and good take-up at Singapore residential launches. See City Developments Announcements.
  • A key concern remains on the impact of its UK portfolio from Brexit uncertainty and regulatory risks.
  • While valuations are reasonably attractive at > 40% discount to RNAV, the stock lacks a strong catalyst.

Transformation of M&C – the key catalyst to watch out for.

  • As anticipated City Developments succeeded in its bid to privatise Millennium & Copthorne (M&C) hotels (see report: City Developments - RHB Invest 2019-06-10: Revised Takeover Offer For Millennium & Copthorne Hotels), with the stock delisted from the London Stock Exchange on 11 Oct 2019.
  • The successful transformation of hotel operations will be a key re-rating catalyst for City Developments, where EBITDA contribution has been on a declining trend (YTD 2019: SGD137m, vs 9M18: SGD208m and 9M17: SGD256m) due to weaker operational performance, impairments and closure for asset enhancement.
  • In the near term, we expect City Developments to pump in significant capex ( > SGD100m) to better reposition its ageing hotel assets, which should benefit it in long term. Global RevPAR (constant currency) for its hotels improved 4.3%/1.6% y-o-y in 3Q/9M19 respectively.

Good take-up at Singapore residential launches.

  • YTD, six residential projects were launched in Singapore, which saw healthy sales take-up of c.15-55% of total units. 9M19, City Developments sold about 1,130 units (+44% y-o-y) and achieved a higher sales value of SGD2.6bn (+66% y-o-y) providing good earnings visibility. Management earlier guided margins for high-end projects to be > 20% and low teens for mass to mid-end developments.
  • The take-up of its China projects has also been fairly steady with 420 units sold – total sales value of CNY1.4bn (SGD269m).
  • Upcoming Singapore residential launch to watch out for is the Sims Drive site (JV with Hong Leong Holdings) in 1Q20.

Fund management slowly gaining traction.

Asset enhancements.

  • Republic Plaza’s SGD70m AEI was completed in Sep 2019 with committed occupancy of > 90% and rental 10% higher than pre-AEI rental. Other AEI plans include upgrading works at City Industrial Building and Jungceylon retail mall in Phuket.
  • Management expects high single-digit ROI from asset enhancement works.
  • Gearing post recent acquisitions and AEIs still remains comfortable at 43% (FY18: 31%).

Earnings and RNAV adjustment.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-14
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 10.50 UP 9.200