City Developments - OCBC Investment 2021-03-01: Kitchen Sinking End To FY20

CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - Kitchen Sinking End To FY20

City Developments reported FY20 net loss of S$1.9b.
Full-year dividends lowered to S$0.12 per share (FY19: S$0.20).
Significant impairment of Sincere Property investment; look to starting FY21 afresh.

City Developments (SGX:C09) reported a net loss attributable to shareholders of S$1.9b in FY20, versus PATMI of S$564.6m in FY19. This was below our expectations. Net loss was largely driven by a significant impairment and share of loss from its investment in Sincere Property Group (Sincere) amounting to S$1.8b.
City Developments's FY20 total dividend per share was lowered to S$0.12 (FY19: S$0.20).
Notwithstanding the weak set of results, we believe this kitchen sinking exercise sets expectations for FY21 at a much lower base and investors should look forward to a recovery underpinned by a macroeconomic rebound.

Sincere’s S$1.8b negative contribution to City Developments in FY20 can be broken down as follows:
1. S$882m of impairment loss on equity investment (fully written off) and equity account for loss,
2. S$612m of impairment losses on bond investment and receivables owed, and
3. S$283m of provision for corporate guarantee.
With this impairment exercise, Sincere’s estimated RNAV has declined by 95% and City Developments only has S$126m of net exposure to Sincere left on its balance sheet. It will thus start FY21 with its balance sheet on a cleaner slate.
Management highlighted that it had done sufficient due diligence on Sincere prior to its investment, but acknowledged that the debt restructuring exercise of the entity was more challenging than anticipated.
We believe Sincere is not fully out of the woods yet, as it has RMB20.6b of principal loans repayment in 2021, versus RMB2.0-4.4b from 2022 to 2025. That said, City Developments has ring-fenced its own balance sheet from Sincere, and has committed not to inject new funds into Sincere until it has recovered to a healthy position.

City Developments’s net gearing increased to 93%, or 62% if we include fair value gains on its investment properties. Management highlighted that its comfortable net gearing target was 65% (including fair value of investment properties).
City Developments will continue to explore the potential listing of a new UK commercial REIT on the Singapore Exchange, but would prefer to first add a third property to increase the scale of its UK portfolio.
In 2020, City Developments sold 1,318 residential units in Singapore with an aggregate value of S$1.8b. Revenue recognition was delayed due to disruption from COVID-19, but is likely to speed up in 2021. City Developments intends to launch Irwell Hill Residences in 2Q21 and Liang Court redevelopment project in 2H21.
Other initiatives by City Developments to unlock value include the redevelopment of Fuji Xerox Towers and Central Mall, both of which would come with a potential uplift in GFA.
See City Developments Share Price; City Developments Target Price; City Developments Analyst Reports; City Developments Dividend History; City Developments Announcements; City Developments Latest News.
After taking into account City Developments’s full-year results, we lower our fair value estimate from S$9.65 to S$9.12 as we similarly write-off Sincere’s contribution in our RNAV model.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-03-01

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