City Developments - UOB Kay Hian 2020-05-13: Looking For Glimmers Of Hope In 1Q20

CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - Looking For Glimmers Of Hope In 1Q20

City Developments (SGX:C09) provided a mostly negative update on its 1Q20 business, which was largely expected by the market. Its hospitality portfolio was the worst hit with occupancy and RevPAR declining significantly.
We lower City Developments' earnings for 2020-22 by 7-22%.
Maintain BUY. Cut target price to S$9.50, which incorporates a higher discount to our assessed RNAV.

Although 1Q20 revenue for this segment fell 46% y-o-y to S$248m, we were surprised that City Developments managed to chalk up sales of 185 units, up 7% y-o-y, with most of these being mid-to mass-market properties. The company has more than 1,800 units in its launch pipeline with Penrose at Sims Drive (566 units) in 2H20 and two other as-yet-unnamed developments at Irwell Bank Road (estimated 580 units) and Liang Court (estimated 700 units). See City Developments Announcements.
Nevertheless, as the Circuit Breaker (CB) measures only started in April, we expect sales weakness to persist in 2Q20.

City Developments’s Singapore office portfolio was solid in 1Q20 with an average office occupancy of 90.9% for 1Q20, and above the Singapore average of 89% for the same period. As expected, City Developments said that 80% of its F&B and retail tenants (totalling 426 tenants) are shut at present due to CB measures, and it is providing over S$23m in property tax and rental rebates (average of 2.8 months of rental rebates).

As expected, City Developments’s hotel portfolio performed badly in the face of global travel restrictions due to the COVID-19 pandemic with 44, or 30%, of its 152 hotels closed. Globally, City Developments’s hotel portfolio registered occupancy of 52% in 1Q20 vs. 70% in 1Q19 while its RevPAR on a global basis declined 27% to S$91.

Since 2002, City Developments has paid a final ordinary dividend of between S$0.075-0.080/share. The company has topped this up with final special dividends with the exception of 2002, 2004 and 2008-09 when the economy and its business did poorly. In our view, there is a likelihood that City Developments may elect to hold off on paying a final special dividend in 2020 given the scale of the damage wrought on its business globally.
We have not factored this into our numbers at present. In 2019, City Developments paid an ordinary and special dividend of S$0.08 and S$0.12/share respectively.

As at end-1Q20, City Developments’s net debt/equity was 44% with cash reserves of S$3.3b as well as undrawn and committed credit lines of S$2.3b. In addition, interest cover was decent at 6.2x with a manageable debt expiry profile out to 2022. City Developments stated that it has completed the refinancing of 17% of its S$1.8b in loans due for the remainder of 2020, and funds have already been set aside for the repayment of 65%, and the balance 18% scheduled for renewal in 3Q20.

On 15 Apr 20, City Developments announced that it had managed to renegotiate the terms of its strategic investment in Sincere Property Group. The new deal comprising S$880m for 51.01% of Sincere values the company at S$1.725b, or 48% lower than the the prior terms which valued Sincere at S$3.3b.
City Developments further disclosed that the new terms value Sincere at 0.5x P/NAV. Importantly, the new deal incorporates a call option exercisable in 2022 to purchase an additional 9% effective interest for S$160m at the same entry valuation, thus allowing City Developments to have 60.01% stake in Sincere and sole control of one of China’s Top 100 real estate developers. The deal is expected to be completed by end-2Q20.

We have downgraded earnings for 2020-22 by 7-22% to reflect the negative impact of the COVID-19 outbreak. The downgrade takes into account lower property development sell-through in Singapore and China as well as materially lower profit margins at its hotel properties stemming from lower occupancy rates as well as RevPAR.
In our view, COVID-19-related earnings downgrades could still come from its European and US hotel properties; however this could partially be mitigated by the re-opening of China and the partial relaxation of the CB measures in Singapore.

We maintain our BUY recommendation on City Developments but lower our target price to S$9.50 (previously S$12.50).
Our new target price incorporates a higher discount of 30% to our assessed RNAV of S$14.20 vs the previous 20% discount. We believe that this higher discount is justifiable in the face of the current business and economic uncertainty as a result of the COVID-19 pandemic.
At S$9.50, the company would be trading at a 2020F P/B of 0.8x or -1SD from its 10-year average P/B.
See City Developments Share Price; City Developments Target Price; City Developments Analyst Reports; City Developments Dividend History; City Developments Announcements; City Developments Latest News.
City Developments share price catalyst:
- Business and operational recovery once the COVID-19 outbreak is stemmed
- Strategic asset sales and capital recycling in UK and hospitality segments.

Adrian Loh UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-13

SGX Stock Analyst Report BUY MAINTAIN BUY 9.50 DOWN 12.500