City Developments - RHB Invest 2020-08-14: Looking Beyond Near-term Headwinds; BUY


City Developments - Looking Beyond Near-term Headwinds; BUY

  • City Developments (SGX:C09)’s 1H20 numbers were weak, mainly from SGD208m pretax losses in hotel operations. Resilience is however noted across its property development and office portfolio.
  • We are positive on the group’s plans to redevelop two of its older assets in Singapore and divest its non-core hotels and China assets. In our view, near-term headwinds have been fully priced in, with the stock trading at -2SD levels in terms of P/BV and P/RNAV.

To redevelop FXT and CM tapping on government incentive schemes.

  • Fuji Xerox Towers (FXT), a freehold office building will be converted into a mixed-use project comprising 60% residential units and 40% commercial space with a potential 25% uplift in GFA under the Central Business District Incentive Scheme.
  • For Central mall, it plans to convert it into a mixed use, with 70% commercial and 30% hotel or serviced apartments with GFA uplift expected under the Strategic Development Incentive Scheme.
  • No details on redevelopment costs were shared as plans are still in preliminary stages and subjected to the authorities’ approvals. We view the move positively as it will help to better reposition ageing assets and boost recurring income.

Residential segment to stay resilient.

  • In Singapore, City Developments sold 356 units (1H19: 505 units) in 1H20 despite closure of show flats for 10 weeks. With resilient demand and lowering of supply under the Government Land Sales, management does not see the need to lower prices, and in fact, it has slightly increased the prices of some projects. China and Australia also saw healthy take-up.
  • The company plans to launch its JV project – Penrose (566 units) in 3Q20 – we expect healthy demand due to its close proximity to the Aljunied MRT station and transformation of the Paya Lebar precinct.

More divestments expected; Potential listing of UK commercial assets under REIT in 1Q21.

  • City Developments plans to divest some of its non-core hotel assets and China retail malls to strengthen its balance sheet and recycle capital. Net gearing stands at 0.7x (0.5x including fair value of investment portfolio), with a healthy cash position, which we believe can withstand a protracted slowdown in the hospitality segment.
  • Plans to list its UK commercial assets under the REIT should also help lower its gearing further.

Near-term headwinds for hospitality segment.

  • RevPAR for its hospitality portfolio (~1/3 of its assets) fell sharply 57% y-o-y, with all markets impacted by border closures and lockdowns. While 3Q likely to remain weak we expect some improvement later in the year with the opening up of green channels and travel bubbles.
  • Any potential breakthrough in a vaccine for COVID-19 will also be a major catalyst for its hospitality portfolio.

Earnings changes.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-08-14
SGX Stock Analyst Report BUY MAINTAIN BUY 9.500 SAME 9.500