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


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.

City Dev’s Singapore property development surprisingly strong.

  • 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 Dev’s Singapore office portfolio was solid in 1Q20

  • 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).

Hotel portfolio bearing the brunt of the COVID-19 pandemic.

  • 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.

Scaling back on the special dividend is a possibility, in our view.

  • 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.

Strong balance sheet.

  • 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.

An advantageous repricing to further expand in China.

  • 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.

Downgrade City Dev’s earnings for 2020-22 by 7-22%

  • 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.

Maintain our BUY recommendation on City Dev

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