City Developments - UOB Kay Hian 2020-08-14: 1H20 A Tough Half Year With A Potentially Long ‘U-shaped’ Recovery

CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - 1H20 A Tough Half Year With A Potentially Long ‘U-shaped’ Recovery

City Developments reported weaker-than-expected results with PATMI declining 99% y-o-y to S$3m, dragged down mostly by the COVID-19 impact on its hospitality segment. While weakness in this segment will persist, its Singapore and China residential segments as well as redevelopment initiatives at two Singapore assets may provide near-to medium-term uplift.
We downgrade 2020-22 earnings estimates.
Maintain BUY with a slightly lower target price of S$9.20.

City Developments (SGX:C09) reported 1H20 results that were below expectations with revenue declining 33% y-o-y to S$1.1b and PATMI tumbling more than 99% to S$3.1m due to the COVID-19 pandemic. The 1H19 comparable period was also bolstered by a S$197m pre-tax gain from the closure of the PPS2 platform and sale of assets.
However, with Singapore and China appearing to have successfully contained the COVID-19 outbreak, City Developments' share price may be positively impacted by incrementally better newsflow if the respective economies continue to re-open. However with Auckland, New Zealand, locking down again after discovering new cases recently, the fear is that a second wave will negatively affect City Developments.
As expected, hotel operations was the lowlight, recording a S$208m pre-tax loss, including S$34m in COVID-19-related impairment losses for its hotel properties. City Developments stated that it expects losses to continue at this segment in the current quarter as well as 4Q20.

... and believes that prices will remain reasonably robust due to its view that there is pent-up demand arising from the lack of sales during the COVID-19 lockdown. In addition, management highlighted that Singapore property prices may be supported given the lack of government land sales in 2H20. Over the next 6-9 months, its Liang Court, Penrose and Irwell Bank projects will provide City Developments with around 1,800 units in its launch pipeline.
In its China markets, City Developments conceded it had seen weaker home pricing as developers have been discounting in order to move their inventory; however it believes that pricing levels should increase in 2H20.
The trend to Work From Home (WFH) as a result of COVID-19 does not appear to have shaken management’s faith in commercial buildings as it still believes that corporates want and need to have a central office presence, particularly in Grade-A buildings. While it estimates that between 10-30% of its tenants are back in the office, it has also seen a continuous flow of enquiries for new office space, particularly from large tech companies.

City Developments stated that this segment is expected to incur losses through to year-end. In 1H20, its RevPAR fell 57% y-o-y in constant currency terms to S$60.3. In the near to medium term, City Developments appeared most confident of its US hospitality business but highlighted the danger of going back into lockdown.

City Developments disclosed that, subject to URA approval, it will look to redevelop Fuji Xerox Tower into a 51-storey freehold integrated development under the CBD incentive scheme. As a result, it will provisionally get a 25% uplift in GFA which will likely lead to a valuation gain for the company.
In addition, City Developments is also looking at redeveloping its Central Mall asset, pending approval from URA. As a result of these two redevelopment plans, we believe that City Developments will register significant revaluation gains in due course as the current carrying value for these two assets are very low, eg the Fuji Xerox Tower is currently carried at less than $150m, or c.S$420psf on present NLA.

City Developments has already put in place a new management team which, together with the Singapore HQ, will look at debt restructuring and asset divestment from next year onwards as the business is, in the view of City Developments, still too heavily leveraged towards retail investment properties. The company was at pains to emphasise that it is not a forced seller and will take its time to obtain the right price.

We have materially downgraded City Developments' earnings for 2020 to further reflect the negative impact of the COVID-19 outbreak, taking into account:
1. negative profit margins at its hotel properties stemming from lower occupancy rates as well as RevPAR, and
2. slower sell-through of its Singapore residential properties.
We had previously highlighted the likelihood of earnings downside from its European and US hotel properties, mitigated somewhat by the re-opening of China and Singapore. For the earnings downgrades in 2021 and 2022, these incorporate slower-than-expected resumption of business and leisure travel which will impact its hospitality business.
We have also cut our DPS estimates for City Developments as we do not expect any special dividends.

We maintain our BUY recommendation on City Developments with a lower target price of S$9.20 (previously S$9.50) due to changes in our assessed RNAV as a result of the earnings changes today. Our target price incorporates a discount of 30% to our assessed RNAV of S$13.80 (previously S$14.20).
Note City Developments’s disclosure that its NAV and RNAV per share as at end-1H20 was S$11.66 (+0.5% y-o-y) and S$16.61 (+0.9% y-o-y). At S$9.20, 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.

Continued business and operational recovery post COVID-19 outbreak, especially in the US & Europe and more importantly, the finding of a successful vaccine against the virus.
IPO of its UK commercial assets in a REIT in 1Q21.
Non-core asset sales at its Sincere China business.

Adrian Loh UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-14

SGX Stock Analyst Report BUY MAINTAIN BUY 9.20 DOWN 9.500