City Developments - CGS-CIMB Research 2020-05-12: Near-Term Headwinds

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CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - Near-Term Headwinds

• Challenging operating performance in 1Q20.
• Slower retail rental and hospitality income in the near term.
• Reiterate ADD rating with a lower Target Price of S$10.13.

City Developments 1Q20 business update

• In its 1Q20 business update, City Developments (SGX:C09) indicated that its operating performance, particularly the retail and hospitality sectors, have been affected by the COVID-19 pandemic. To mitigate the near-term uncertainty, it has implemented cost efficiency and cash preservation initiatives such as lowering Board and Management fees, deferring non-essential capex and operating costs.
• City Developments's balance sheet remains healthy with end-1Q20 net gearing of 62% (44% including fair value gains), total cash holdings of S$3.3bn and undrawn and committed credit facilities of S$2.3bn.

Ongoing residential sales in 1Q, plans new launch for 2H20

• Residential sales and development activities in Singapore, China, UK and Australia were adversely impacted by closure of showflats and slowdown in construction activities.
• In 1Q20, City Developments recorded sales of 185 units (+7% y-o-y) in Singapore with a lower value of S$278m, mainly from its mass and mid-end projects. In Apr, management indicated that it continued to register sales from ongoing Singapore projects such as The Tapestry and Whistler Grand, and also stepped up digital marketing efforts.
• It plans to launch 566-unit Penrose at Sims Drive in 2H20.

Slower retail rental income

• The retail segment was affected by temporary closures of non-essential businesses due to the circuit breaker in Singapore and lockdown in China. City Developments is providing rental relief totaling S$30m to tenants in Singapore and overseas.
• In Singapore, rebates including property tax amount to c.2.8 months of gross rents. In addition, it will also assist tenants with cashflow issues by allowing them to offset rent using part of their security deposit as well as other initiatives.

Hospitality segment severely affected by COVID-19 outbreak

• Hotel operations were severely affected by the COVID-19 outbreak with around 30% of its 152 hotels worldwide closed, largely in UK, Europe and New Zealand. As a result, 1Q20 RevPar declined 27% y-o-y, dragged by a 37.2% drop in RevPar for Asia.
• To manage costs, certain floors and sections are closed for hotels that are still operating. In addition, Millennium & Copthorne (M&C) is also utilising this down period to carry out guest-related asset enhancement works.

Reiterate Add rating

• We cut our City Developments's FY20-21F EPS by 3.4-18% to factor in a weak operating environment for its global hospitality business and lower rental income, but raise our FY22F EPS by 7.5% in anticipation of a recovery across its business segments. Accordingly, our Target Price is lowered to S$10.13, pegged to an unchanged 45% discount to RNAV. See attached PDF report for City Developments's RNAV breakdown.
• See City Developments Share Price; City Developments Target Price; City Developments Analyst Reports; City Developments Dividend History; City Developments Announcements; City Developments Latest News.
• A potential re-rating catalyst is a pick-up in the Singapore residential market and faster-than-expected recovery in the global hospitality sector.
• Downside risks: slow macro outlook.

LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-12

SGX Stock Analyst Report ADD MAINTAIN ADD 10.13 DOWN 10.230