City Developments - UOB Kay Hian 2021-05-20: Approaching The Trough

CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - Approaching The Trough

Singapore residential property development remains a highlight for City Developments in its 1Q21 business update. While the rest of its businesses continue to face near-term challenges, we believe that the trough will be in the 2Q21/3Q21 period.
Over the next six months, one potential share-price catalyst for City Developments is the company’s IPO of its UK commercial assets.
Maintain BUY. Target price: S$8.50.

City Developments (SGX:C09) reported a tough set of numbers for 1Q21 with most of its business segments suffering from the effects of COVID-19. Only its Singapore residential business stood out with sales of 319 units and sales value of S$513.6m, up 72% y-o-y. The company stated that strong sales performance occurred across the gamut of its property categories, from executive condominiums to luxury apartments. In the latter category, City Developments’s Apr 21 launch of Irwell Bank Residences at an ASP of S$2,700psf was a success, with 60% of its 540 units sold.

We understand that the Qatar Investment Authority, the 11th largest sovereign wealth fund globally, is looking to inject its property in London’s Canary Wharf, which houses HSBC's head office, into City Developments’s UK commercial REIT. We view this development in a positive light as it would bulk up the REIT, bring in a long-term investor, and give the REIT an asset that we assume has a long weighted average lease to expiry. The IPO of this REIT had been delayed from last year due to COVID-19 and is currently targeted for 3Q21.

Like Singapore’s shipyards business, property developers have been facing manpower shortages as many migrant workers have returned to South Asia and cannot return to Singapore, thus resulting in higher levels of competition for workers due to reduced supply. This could have the effect of driving up construction costs for new developments in the medium term, thus reducing profit margins.

In its 1Q21 update, City Developments commented that Sincere Property “continues to face liquidity challenges” and is working to either raise cash via asset sales or to speed up its collections. Nevertheless, City Developments believes that it remains in a comfortable position with cash reserves of S$3.4b and undrawn committed bank facilities of S$5.5b.

While a majority of City Developments’s office portfolio across its Singapore and overseas properties have seen resilient occupancy rates, its Singapore retail portfolio will face increased marketing costs in the near term due to new Phase 2 “Heightened Alert” restrictions. With Singapore going backwards by allowing only 50% of workers returning to the office, down from 75%, City Developments’s retail tenants will struggle with consumer demand until at least mid-Jun 21.

The sole bright spot in 1Q21 was Singapore’s occupancy rate which rose 16% y-o-y while the rest of City Developments’s hotel operations saw y-o-y declines of 9-38%. Average room rates also declined y-o-y, ranging from -10% in New Zealand to -49% in London. In its market commentary, City Developments highlighted better recovery prospects in the US and UK, both of which have seen successful vaccine rollouts.

We have lowered our earnings forecasts for City Developments by 17-20% for 2021 and 2022 mainly to factor in slower recovery in hotel operations as a result of the lack of leisure and business travel due to COVID-19. We have raised our 2023 earnings by 24% on recovery in hotel operations as well as contributions from new property launches.

We maintain our BUY rating on City Developments and the target price of S$8.50, which is a 40% discount to our RNAV of S$13.50/share. We view this discount as fair given that Sincere continues to be a drag on the company in the near to medium term.
City Developments disclosed during its 2020 results briefing that its RNAV (excluding revaluation of its hotel portfolio) was S$14.26/share as at end-4Q20.
Valuations appear inexpensive on a P/B basis as City Developments’s current P/B of 0.71x is 1.5 standard deviation below its five-year P/B average of 0.92x. However its 2022 P/E of 12.1x is a 5% discount to the company’s past-five-year average of 12.7x. At our target price of S$8.50, City Developments would trade at a 2021F P/B of 0.9x which we view as fair.
See

Continued economic recovery from COVID-19 especially resumption of leisure and business travel.
Announcement of monetisation strategies such as the IPO of its commercial assets in the UK.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-20

SGX Stock Analyst Report BUY MAINTAIN BUY 8.500 SAME 8.500