City Developments - OCBC Investment 2020-07-15: Down But Not Out

SGinvestors.io

CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - Down But Not Out 

• City Developments guided for a subdued set of 1H20 results.
• Liquidity position remains healthy.
• Lower Fair Value to S$10.74.

Profit guidance on substantial reduction in 1H20 pre-tax profit

• City Developments (SGX:C09) recently provided a profit guidance on its upcoming 1H20 results. It expects its 1H20 pre-tax profit to be substantially lower as compared to 1H19, while PATMI will also be materially and adversely impacted from the Covid-19 crisis.
• All of City Developments’ major business segments are expected to contribute to this decline, especially its hotel operations, which is mainly led by its wholly-owned subsidiary, Millennium & Copthorne Hotels Limited (M&C). RevPAR in 1H20 is expected to see a dip of ~50-60%. Despite efforts to control costs, the hotel operations segment is expected to post a pre-tax loss of approximately S$120-140m for 1H20, a stark contrast to a pre-tax profit of S$76m recorded in 1H19.
• City Developments’ property development segment is also expected to register a dip in revenue by ~10% due to the shutdown of showflats during the circuit breaker period and recognition of lower margin projects as compared to 1H19.
• As for City Developments’ investment properties segment, the negative impact will come from more than S$30m of property tax and rental rebates given to its tenants, especially for its retail malls in Singapore and overseas. Furthermore, there was also a significant S$197m pre-tax gain which arose from the closure of its Profit Participation Securities 2 platform in 1H19.
• Nevertheless, the aforementioned factors are expected to be mitigated by the recording of a negative goodwill as a result of City Developments’s 51.0% acquisition of Sincere Property Group announced in Apr 2020. As a recap, City Developments was able to acquire this Chinese property developer at a P/NAV of 0.52x.

Financial position remains robust

• Although there are still uncertainties over the length and depth of the Covid-19 pandemic, City Developments highlighted that it has sufficient liquidity to weather the crisis. To date, it has total cash and undrawn and committed credit facilities exceeding S$5b. Total debt maturing in 2020 was S$1.8b, as at 31 Mar 2020.

Cheap valuations; negatives likely priced in

• We cut our City Developments's FY20F and FY21F PATMI forecasts by 47.3% and 19.3%, respectively, to take into account the impact from Covid-19. We also make the following changes to our RNAV assumptions:
  1. higher cap rate assumptions of 50 bps for City Developments’ investment properties portfolio,
  2. lower ASP for residential projects in Singapore,
  3. slightly higher valuation for City Developments’ acquisition of Sincere Property Group given a more attractive entry point than initially proposed,
  4. lower valuation on City Developments’ M&C portfolio by 8.3% in light of headwinds facing the hospitality sector from Covid-19.
• Consequently, our RNAV estimate is lowered by 10.6% to S$16.53. Applying this to an unchanged 35% discount peg which we believe is sufficiently conservative, we derive a revised fair value of S$10.74 (previously S$12.01).
• Notwithstanding our lower fair value estimate, we opine that deep value still exists in City Developments’ shares, with the stock trading at 0.70x FY20F P/B ratio, which is 1.3 standard deviations below its 10-year mean of 1.0x.
• City Developments share price (as at 14 Jul 2020 close) also translates to an attractive P/RNAV of 0.50x.
• 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 to report 2Q20 results on 13 Aug. See 1H2020 Earnings Schedule for STI Constituents.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-07-15

SGX Stock Analyst Report BUY MAINTAIN BUY 10.74 DOWN 12.010