City Developments - DBS Research 2020-02-27: Transform And Roll Out

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CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - Transform And Roll Out

• City Developments's FY19 net profit grew 1.3% y-o-y to S$565m, in line, supported by divestment gains.
• FY19 sales volume rose 49% y-o-y; targets to launch Sims Drive in 1H20.
• Asset rejuvenation/redevelopment plans are underway.
• Declared final dividend of 8 Scts and special final dividend of 6 Scts, bringing total FY19 dividend to 20 Scts (flat y-o-y).

FY19 results in line; PATMI boosted by divestment gains from PPS 2

• City Developments (SGX:C09)’s FY19 net profit grew 1.3% y-o-y to S$565m, in line with our estimates, largely supported by divestment gains of assets from PPS2 (Manulife Centre and 7&9 Tampines Grande) and lower impairment losses (S$58m in FY19 vs S$94m in FY18). This is offset by lower contributions from property development (PBT -39% y-o-y) as projects were recorded on a progressive basis in FY19 while completed projects were recorded in their entirety in FY18.
• 4Q19 net profit increased 12.5% y-o-y to S$88m mainly due to lower impairment losses for hotels (S$21m in FY19 vs S$94m in FY18).

Property division:

• FY19 revenue and PBT fell 44% y-o-y and 39% y-o-y respectively mainly due to the absence of lump sum recognition in FY18 including
  1. The Criterion EC upon completion in Feb 2018,
  2. New Futura and Gramercy Park which were completed,
  3. overseas projects such as HLCC and Park Court Aoyama.
• PBT margins have inched up slightly to 33% vs 31% in FY18 (margins were dampened by The Criterion EC).

Hotel operations:

• FY19 revenue grew 1.5% y-o-y but PBT recorded a S$7m loss vs S$40m profit in FY18, impacted by hotels closed for refurbishment/rebranding exercise, challenging markets such as the US, and transaction costs for M&C privatisation which amounted to S$26.2m. The opening and marketing of The Biltmore Mayfair also contributed to a loss of S$21m.

Rental properties:

• FY19 revenue and PBT increased 22% y-o-y and 56% y-o-y respectively mainly led by divestment gains and full-quarter contributions from three buildings acquired in 1H18, namely Aldgate House (London), 125 Old Broad Street (London) and Central Mall Office Tower.

Operating metrics:

• Net gearing increased to 61% from 31% in FY18. Net gearing (including fair value) increased to 43% vs 23% in FY18.
• Average borrowing cost inched up marginally to 2.4% vs 2.3% in FY18.
• City Developments declared final dividend of 8 Scts per share (flat y-o-y) and special final dividend of 6 Scts per share (flat y-o-y), bringing total FY19 dividend to 20 Scts (flat y-o-y).

Operational updates

Residential – Singapore sales volume rose 40% y-o-y and sales value also increased 49% y-o-y.

• City Developments's FY19 property sales volume in Singapore increased 40% y-o-y to 1,554 units and sales value also increased 49% y-o-y to S$3.3b due to higher-priced luxury residential projects.
• A total of 2,434 units were launched in Singapore in FY19, out of which approximately 1,000 units were sold.
• In 4Q19, City Developments launched Sengkang Grand Residences (sold 35% of total units).
• Launch pipeline stood at 1,146 units with upcoming launches expected as follows:
  1. Sims Drive (566 units) in 1H20 and
  2. Irwell Bank Road – land just awarded in Jan 2020.

Commercial properties

• In Singapore, its office and retail properties remain stable with occupancies of 89.8% and 94.7% respectively in 4Q19 vs 91.3% and 94.2% respectively in 3Q19.
• In FY19, office and retail rents underwent positive rental reversions. We expect further positive rental reversions going forward, specifically at Republic Plaza with AEI works completed.
• Currently exploring ways to tap on the CBD incentive scheme to potentially increase Fuji Xerox Tower’s GFA by up to 25%.
• Upgrading works on two industrial assets, namely City Industrial Building and Cideco Industrial Complex, are ongoing.

Hotel – RevPAR (on constant currency) +0.8% y-o-y partially impacted by closures/refurbishments

• FY19 RevPAR +0.9% y-o-y. On a constant currency basis, the group’s RevPAR rose 0.8% y-o-y.
• On a constant currency basis, RevPAR was still impacted by Europe (ex London) (-6.3%), US (-0.8%) and Asia ex Singapore (-0.6%). However, the RevPAR for the individual markets of Singapore increased 10% while that of London increased 7%.
• M&C has been successfully privatised and management will work on integrating the new assets into the portfolio, as well as explore AEI works where necessary.
• The Biltmore Mayfair (previously Millennium Hotel London Mayfair) re-opened on 9 Sep 2019 as a 5-star deluxe property, as LXR hotels & Resort’s first UK property after GBP60m refurbishment.
• Renegotiating its investment in Sincere Property Group
• In May 2019, City Developments announced its proposed investment in/partnership with Sincere Property Group including an acquisition of Shanghai Hongqiao Sincere Centre (Phase2), Shanghai.
• While the acquisition of the commercial building in Shanghai has completed, City Developments is in the midst of renegotiating its investment in Sincere Property Group, likely to be on more favourable terms.

Outlook

Rising to the challenge of COVID-19

• Operations in FY20 have been hit by the COVID-19 outbreak especially on its hospitality segment as retail assets remain small within the group.
• Occupancies at its Singapore hotels are currently around the 40-50% levels but remain profitable due to their lower cost margins. Breakeven is at the c.30% level. Management hopes to see some recoveries from Jul-Aug 2020 when the weather becomes warmer.
• Serviced residences in China remain relatively healthy with occupancy levels of c.70% due to the nature of longer leases.
• Management may take the opportunity to accelerate its AEI plans during this lull period.

M&C rejuvenation plans

• In FY20, management has a planned capex programme of S$140m with ongoing phased AEI works at Millennium Hotel Gloucester London Kensington, Millennium Hotel Paris Opera and Copthorne King’s Hotel, while planned capex are still in the works for Millennium Hilton New York Downtown, Grand Copthrone Waterfront Hotel and Studio M Hotel.
• Management believes capex will remain at these levels for the next few years given its focus on revamping the M&C portfolio.
• In addition to asset refurbishments, management is reviewing its portfolio for potential redevelopment into another asset class (residential or commercial) given its assets sit on strategic locations.

Asset recycling/fund management platform

• City Developments may explore monetising the European/UK portfolio with a preference of a REIT vs a private fund structure.
• As part of its plans to grow its recurring income and fund management platform, City Developments has expressed that it will be a more supportive sponsor to its REIT, i.e. CDL Hospitality Trusts (SGX:J85). This implies potential asset recycling of some hospitality assets into CDL Hospitality Trusts.
• The announced divestment of W Singapore is expected to be completed in 2Q20.

Maintain BUY; Target Price of S$13.00

• We maintain our BUY rating and Target Price of S$13.00. It is currently trading at 0.9x FY20F P/NAV, close to the historical average traded during the last property cycle (FY13-17).
• See City Developments Share Price; City Developments Target Price; City Developments Analyst Reports; City Developments Dividend History; City Developments Announcements; City Developments Latest News.
• We believe City Developments share price could trade up to the higher end of the trading range, given the positive catalysts of
  1. potential ongoing enhancement of its M&C assets,
  2. building up its fund management business through the launch of new platforms (REITs/private funds), and
  3. better-than-expected sell-through

Derek TAN DBS Group Research | Rachel TAN DBS Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-02-27

SGX Stock Analyst Report BUY MAINTAIN BUY 13.000 SAME 13.000