City Developments 3Q20 Business Update - UOB Kay Hian 2020-12-01: Profit Warning Largely Expected

CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments 3Q20 Business Update - Profit Warning Largely Expected

City Developments (SGX:C09) released its 3Q20 business update and a profit warning that was generally in line with expectations. Its Sincere investment in China and its hospitality arm remain drags on the overall business.
Meanwhile, Singapore property development and its office portfolio remain reasonably resilient in our view.
Maintain BUY. Target price: S$9.20.

Yesterday, City Developments (SGX:C09) issued a profit warning stating that it expects to record a loss in 2020 due to the impact of COVID-19 on its property development, investment properties and hospitality businesses. See City Developments Announcements.
In our view, this was largely expected by the market. We highlight that prior to the profit warning, our profit forecasts were at the bottom of consensus estimates.

City Developments disclosed that its appointed external financial advisor, Deloitte, has completed its review of its Sincere investment in China, and that it has ascertained that “there are good assets that the group can extract further value (from)”. However, the company will only release the fair value of the net identifiable assets of Sincere before 31 Dec 20.
For 9M20, City Developments has already equity accounted for its share of losses in Sincere totaling S$76m due to lower sales that was affected by COVID-19, financing costs and the release of fair value uplift for the development properties portfolio.
City Developments also guided for Sincere to be loss-making in 4Q20.

While its Penrose development at Sims Drive in Singapore (60% Hong Leong and 40% City Developments) achieved encouraging sales following its launch in Sep 20, City Developments disclosed that 9M20 revenue for this business segment declined 15% y-o-y (1H20: -13% y-o-y) and guided for profit margins to contract given the higher proportion of revenue from mass-market projects vs 9M19. On a q-o-q basis, City Developments’s Singapore property sales grew nearly threefold to S$914m.
Its investment properties segment registered a 14% y-o-y decline in revenue for 9M20 (1H20: -11% y-o-y), with City Developments echoing CapitaLand (SGX:C31)’s comment that sentiment in the office-rental market has been weak.
Nevertheless, the company’s Singapore office portfolio has strong committed occupancy of 92% and 4ppt above Singapore’s occupancy rate. Ytd, City Developments has extended over $30m of property tax and rental rebates to its retail tenants in Singapore and overseas.

City Developments guided for losses in the hospitality segment for 2020 due to the collapse in global travel and tourism, with RevPAR declining by 63% y-o-y in 9M20 while hotel revenue declined 60% y-o-y. Note that in 1H20, its RevPAR fell 57% y-o-y, thus implying that 3Q20 has seen further deterioration in its business, despite having only 11% of its 153 hotels out of operation vs 28% in 1H20.
For 1H20, City Developments provided for impairment losses of $33.9m and further flagged that it expects to record further impairment losses in 2H20. Currently, we have assumed a similar amount of impairments as that of 1H20.

At present, City Developments remains financially strong with S$4.7b in cash and available undrawn committed bank facilities. The company has been proactive in adjusting its cost structure as well as deferring any unnecessary capex.

We have assumed an additional S$100m in impairments for 2020 and thus our prior expectation for a S$16m profit has been lowered to a S$71m loss. We highlight that, at this stage, the amount of impairments for 2020 that will be undertaken by City Developments is largely unknown and our estimate may be subject to change in late-Dec 20.
City Developments will report its full-year 2020 financial results in Feb 21.

City Developments stated that notwithstanding successful implementation of a vaccine regionally and globally in 2021, it expects COVID-19 to continue to have a negative effect on its business.
In our view, the worst of the COVID-19 impact is behind us and we should see a gradual, if slow, recovery in 2021, thus underpinning City Developments’s as well as the broader market’s valuations.

We maintain our BUY recommendation on City Developments with unchanged target price of S$9.20. Our target price incorporates a discount of 30% to our assessed RNAV of S$13.80.
In the near to medium term, City Developments remains a market proxy to post-COVID-19 economic recovery given its geographic reach and its business exposure to property development, office rentals, hospitality and tourism sectors.
See City Developments Share Price; City Developments Target Price; City Developments Analyst Reports; City Developments Dividend History; City Developments Announcements; City Developments Latest News.
Current City Developments share price appears inexpensive relative to its disclosed NAV and RNAV as at end-1H20. 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 2021F P/B of 0.78x or -1SD from its 10-year average P/B.
We note that in Nov 20, City Developments share price witnessed an inflection point at around -2SD and bounced hard, up 23% for the month.

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 | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-12-01

SGX Stock Analyst Report BUY MAINTAIN BUY 9.200 SAME 9.200