City Developments - UOB Kay Hian 2021-08-13: 1H21 Glimmers Of Light At The End Of The Tunnel

CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - 1H21 Glimmers Of Light At The End Of The Tunnel

A strong revenue performance from City Developments’s property development arm was not able to offset continued weakness in its hotel operations, the only segment that made a pre-tax loss.
City Developments disclosed that if fair value gains were included, its RNAV would increase to S$14.22. We adjust our earnings downwards to factor in less bullish assumptions for the hotel business but maintain our BUY recommendation as we believe that we are past trough earnings. Target price: S$8.50.

City Developments (SGX:C09) reported an 11% y-o-y increase in revenue to S$1.2b which was better than our expectations largely due to a stronger revenue performance from its property development arm. As indicated to the market in a profit warning last week, City Developments reported a S$32m loss for 1H21 due to a pre-tax loss at its hotel operations, higher financing costs, lower divestment gains and the lack of a tax credit from the New Zealand government which had inflated 1H20 numbers.
City Developments declared an interim dividend of S$0.03 (1H20: no dividend declared).

However, if fair value gains were to be included, City Developments's RNAV would increase to S$14.22. Furthermore, the company disclosed that its RNAV would rise to S$17.00 if revaluation surpluses of its hotel portfolio had been included vs the company's normal practice of using historical cost.

City Developments has a number of upcoming projects which should bolster its medium-term profitability. These include Canning Hill Piers which will launch in 4Q21 with 696 units, the Northumberland Road Government Land Sales site near Farrer Park MRT (won in Apr 21), and the Tengah Garden Walk Executive Condominium site (won in May 21). As at end-1H21, and including JV partners’ share, the company had ~2,000 units in its launch pipeline.

While this segment was still a drag on EBITDA in 1H21, management pointed out that the sequential performance of its hotels business in 2Q21 showed recovery with RevPAR more than doubling to over S$63. Thus, it is cautiously optimistic about the continued upward trajectory of its forward bookings – especially as global vaccination rates accelerate – and singled out its US hotel business as seeing signs of nascent strength.
While availability of human resources is still a valid concern, City Developments’s management stated that it will not look to increase its staffing levels back to pre-COVID-19 levels, but instead increase its digitalisation efforts and use of IT to mitigate such concerns. City Developments’s Executive Chairman Kwek Leng Beng opined that the company’s hospitality business will recover this year.

Gearing levels rose slightly to 97% as at end-1H21 (end-2020: 93%) and appears to be on top of management’s mind as its gearing was mentioned a few times during the analyst briefing. In particular, City Developments said that given its high gearing, it is looking to establish more joint ventures with other property companies in order to allow time for its capital recycling efforts to bear fruit.
Management also stated that it may look to bring in a financial partner for the Fuji Xerox Tower redevelopment so that its gearing “is kept at optimal levels”.

As at end-1H21, City Developments’s net exposure to Sincere remains at S$117m and its financial performance in 1H21 did not reflect any contribution from Sincere. We highlight that there is a potential court judgement next week regarding bankruptcy proceedings for Sincere, and in a worst-case scenario of a liquidation, City Developments would receive S$0.10-0.15 back for every dollar of exposure.
City Developments disclosed that the S$117m in exposure is split into S$17m in bonds and S$100m in receivables with all equity having previously been written off.

We have lowered our earnings forecasts for City Developments by 15-33% for 2021-23 to:
1. recalibrate our previously bullish assumptions regarding the recovery in City Developments’s hotel operations due to COVID-19; and
2. provide for higher financing costs.
Earnings upside could come once we have more details on the company’s new launch projects mentioned above as well as the residential component of the Fuji Xerox tower redevelopment.

We retain our BUY rating on City Developments with a target price of S$8.50, which is a 40% discount to our RNAV of S$13.50/share.
See
We view this discount as fair given the uncertain pace of recovery in City Developments’s hotel operations in the near to medium term. City Developments’s current P/B of 0.68x is close to 2SD below its 5-year P/B average of 0.92x which we view as inexpensive. At our target price of S$8.50, City Developments would trade at a 2021F P/B of 0.9x which we view as a fairer reflection of its valuation.
Share price catalyst: Continued economic recovery from COVID-19 especially resumption of leisure and business wering of movement restrictions.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-13

SGX Stock Analyst Report BUY MAINTAIN BUY 8.500 SAME 8.500