City Developments - CGS-CIMB Research 2021-08-12: On Slightly Firmer Footing

CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - On Slightly Firmer Footing

City Developments's 1H21 net loss of S$32.1m is below our FY21F projection of S$317.5m.
Increasing Singapore development pipeline, hotel operations improve in 2Q.
Reiterate ADD on City Developments with an unchanged target price of S$8.97.

City Developments (SGX:C09) chalked up an 11.1% y-o-y rise in 1H21 revenue to S$1.19bn. However, it reported a S$32.1m net loss for 1H21 due to higher financing costs and tax expenses and smaller divestment gains, partly offset by a ~S$36m negative goodwill recognition for its stake in Shenzhen Longgang Tusincere Tech Park.
All business segments with the exception of hotel operations delivered positive contributions.
On balance sheet metrics, City Developments’s net debt to equity ratio (excluding revaluations) stands at 0.97x at end-1H21.
City Developments declared special interim dividend of S$0.03 per share.

The residential development segment posted a PBT of S$119m, +3.5% y-o-y, on revenue of S$628m. Excluding the negative goodwill item, residential contributions would have been lower y-o-y due to lower development margins and slower profit recognition due to slower construction progress due to COVID-19.
Nonetheless, City Developments sold S$1.7bn (+233% y-o-y) worth of residential properties in 1H21, which will be progressively recognised over the next 2-3 years. In addition, it acquired two land parcels in Singapore in 1H, bringing its potential launch pipeline to 2,000 units. It is targeting to market Canninghill Piers in 4Q21.

Rental revenue declined 8% y-o-y on lower contributions from Jungceylon Retail Mall in Phuket. Committed occupancy for the office/retail portfolio is at 90.6%/93.8% at end-1H21. It has a remaining 12.8%/19.1% of office and retail leases to be renewed in 2H21F.
City Developments has also embarked on several asset enhancement initiatives in Singapore and in Phuket, namely Palais Renaissance, King’s Centre, Tower Club and Junceylon Retail Mall. These upgrades will be completed gradually between 4Q21-1H22F.
In addition, it is redeveloping Fuji Xerox Tower into a mixed-use development with an uplift in floor area to GFA to 655k sq ft, thus enabling City Developments to unlock the value of the property in the medium term.

The hotel segment reported a pre-tax loss of S$143m for 1H21, dragged by lower global RevPAR, though it is an improvement over 1H20’s S$208m loss. Management guided that hotel operations have started to show a gradual recovery towards end-Jun 2021 and all regions were able to record positive gross operating profit for Jun 2021.
City Developments will continue with its digitalisation initiatives, asset enhancements and streamlining of costs to improve efficiencies. Management indicated that it would continue with its efforts to unlock the deep value of the portfolio of hotel assets with the planned divestment of Copthorne Orchid Hotel in Penang.
City Developments will also continue to expand its fund management business via the proposed establishment of a UK commercial S-REIT and maintains its target of reaching US$5bn of AUM by 2023.

We cut our FY21-23F earnings per share forecast for City Developments by 11.7-37.6% as we factor in higher-than-projected hotel losses for FY21F, moderate the pace of hotel recovery in FY22-23F and factor in the income vacuum from the redevelopment of the Fuji Xerox Building.
Our RNAV-based target price for City Developments is maintained at S$8.97.
See
At the current City Developments share price, the market has largely factored in the impact of slower hotel operations. A potential re-rating catalyst is a faster-than-expected recovery in the global hospitality sector.
Downside risk: drag from slow macro outlook.

LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-12

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