City Developments - DBS Research 2021-08-14: Reposition, Redevelop, Revitalise


City Developments - Reposition, Redevelop, Revitalise

  • City Developments's 1H20 results impacted by COVID-19 especially hospitality (pre-tax loss of S$208m), and lower gains.
  • While 1H20 residential sales volume fell 30% y-o-y, ~171 units were sold in 2Q20 despite Circuit Breaker.
  • Redevelopment plans unveiled and potential divestments of non-core assets.
  • Potential listing of UK commercial assets as a REIT will be delayed to 2021.

City Developments' 1H20 results were impacted by COVID-19 pandemic especially hospitality segment and lower gains recognised.

  • City Developments (SGX:C09)’s 1H20 net profit fell 99% y-o-y to S$3m, below our estimates, impacted by COVID-19 pandemic especially the hospitality segment which recorded a PBT loss of S$208m. Despite recognising divestment gains of S$50m and negative goodwill of S$43.2m from the acquisition of Sincere in 1H20, these gains were 53% lower y-o-y vs 1H19’s S$197.2m.
    • Property division: 1H20 revenue and PBT fell 13% y-o-y and 36% y-o-y respectively mainly due lower lump sum recognition of sale of completed projects which was recognised in 1H19 such as Gramercy Park, New Futura, HLCC and Hongqiao Royal Lake. PBT margins fell to 25% vs 34% in FY18 as a result of a thinner margins and progressive recognition from The Tapestry, Whistler Grand and Amber Park.
    • Hotel operations: The hospitality segment, the most severely impacted segment due to COVID-19 pandemic, recorded a pre-tax loss of S$208m vs PBT of S$29.5m in 1H19. These were mainly due to impairment losses of S$33.9m, hotel closures (~28% of the hotels are still closed as at Jun20 vs ~30% as at Mar20), travel restrictions impacting occupancy and RevPAR, but partially offset by divestment gain on Millennium Hotel Cincinnati of S$26.4m.
    • Rental properties: 1H20 revenue and PBT declined 11% y-o-y and 90% y-o-y respectively mainly due to rental rebates of S$30m provided for mainly retail tenants affected by the pandemic, lower revenue for hotels under master lease with CDLHT and lower contributions from hotels under master lease agreements (Millennium Mitsui Garden Hotel Tokyo, Novotel Singapore Clarke Quay and Angsana Velavaru). The significant drop in PBT was due to lower divestment gains recognised (1H19 recognised S$197.2m of gains).
  • City Developments's gearing inched up marginally to 71% vs 62% in 1Q20 while average cost of debt fell to 2.1% vs 2.3% in 1Q20.
  • City Developments has sufficient liquidity to weather through these challenging times with cash reserves at S$2.7bn and S$4bn including available undrawn committed bank facilities (since improved to S$5.1bn to-date).
  • No interim dividend was declared in 1H20 (vs 6 cents in 1H19) due to the challenging conditions.

Residential – Singapore sales volume was down but encouraged to see 171 units of sales clocked in during Circuit Breaker; upcoming launch of Penrose (566 units) expected in 3Q2020

  • 1H20 property sales volume in Singapore fell 30% y-o-y to 0.4k units while sales value dropped 67% y-o-y to S$0.5b.
  • Despite the Circuit Breaker in 2H20, City Developments sold some 171 units (-8% q-o-q) and recorded sales of 227 units since phase 2 reopening from 19 Jun to 9 Aug. Majority of the sales came from The Tapestry, Whistler Grand and Piermont Grand and continues to clock in sales for the high-end properties such as Boulevard 88 and South Beach Residences.
  • Launch pipeline of 1,806 units with upcoming launches:
    1. Penrose (Sims Drive - 566 units) in 3Q2020,
    2. Irwell Bank (540 units) in 1H2021, and
    3. Liang Court Residential (700 units) in 2021.

Commercial properties – occupancies remained relatively stable.

  • In Singapore, occupancies in the office and retail portfolio were relatively stable at 90.6% and 93.2% respectively vs 90.9% and 94.4% respectively in 1Q20.
  • City Developments provided S$30m of rental rebates to mainly retail tenants, of which > S$23m of rental and property tax rebates were provided to its Singapore tenants.

Hotel – most impacted by COVID-19 but seeing gradual recovery as more economies reopen

  • 1H20 RevPAR fell 56.6% y-o-y on constant currency basis from across the region, impacted by the COVID-19 pandemic
  • Overall occupancy has fallen to 39% vs 72% in 1H19 with the European region most hit at 26% while occupancies in Asia, Australasia and US were above 40%.
  • As at June 20, ~28% of the hotels remain closed vs ~30% as at Mar20. However, management has been seeing gradual progressive recoveries as more economies reopen and local travel restrictions have been lifted.

Redevelopment / asset divestment potential – Unveiled redevelopment of Fuji Xerox Towers and Central Mall, potential asset divestment of M&C and Sincere portfolio

  • City Developments unveiled its redevelopment for Fuji Xerox Towers and Central Mall that will see potential uplift in GFA of up to 25%. The redevelopment of Fuji Xerox Towers is expected to increase GFA by 25% to 655k sqft, of which 40% will be commercial and remaining 60% as residential & serviced apartments. The submission for Provisional Permission is being prepared and demolition works are slated to commence in 2H2021.
  • Preliminary planning applications for the redevelopment of Central Mall are currently being reviewed. The proposed plan is to have 70% of commercial space and remaining 30% for hotel & serviced apartments.
  • Liang Court redevelopment has obtained Provisional Permission (PP) on 21 May 2020.
  • The construction of Monk Bridge in Leeds, UK is currently underway and will be positioned for Private Rented Sector (PRS). Demand for rented residential properties has been rising in recent times. The project is estimated to complete in 2023.
  • The acquisition of 78-unit PRS in Yokohama City is expected to complete in 3Q20, in line with expected building completion in Aug-20
  • The listing of UK commercial assets into a REIT will be delayed likely to 1Q2021 when market conditions improve.
  • Following the privatisation of M&C and investment properties into Sincere, management is exploring potential divestments of non-core hotels within the M&C portfolio and investment properties within the Sincere portfolio.
  • We trimmed our FY20F and FY21F earnings by 2-31% post results to reflect lower earnings in 1H20 results.

Maintain BUY; S$10.50 target price.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-08-14
SGX Stock Analyst Report BUY MAINTAIN BUY 10.500 SAME 10.500