City Developments - Phillip Securities 2022-03-14: Promising Turnaround


City Developments - Promising Turnaround

  • City Developments (SGX:C09)'s FY21 revenue of S$2,626mil (+24.5% y-o-y) formed 106% of our forecast but PATMI underperformed due to higher-than-expected taxes, excluding which, performance would have been in line with our forecasts.
  • PATMI in the black due to strong residential sales and recovery in the hospitality segment, which has turned EBITDA positive. City Developments moved 2,185 units in FY21, exceeding our sales forecast of 1,600 units.
  • Proposed dividend of S$0.311 per share (FY20: S$0.12), comprising S$0.12 in cash and a surprise distribution in specie of CDL Hospitality Trusts (SGX:J85) valued at S$0.191.
  • Maintain BUY and RNAV-derived target price S$9.19 (35% discount). We view City Developments as proxy for the Singapore residential market and hospitality recovery play. City Developments is trading at an attractive 48% discount to our RNAV/share of S$14.14. Asset monetisation, unlocking value through AEIs and redevelopments, and faster-than-expected recovery in hospitality portfolio are potential catalyst for City Developments, which could help narrow the discount between City Developments's share price and RNAV.

The Positives

Highest number of residential sales in 10 years.

  • City Developments sold 2,185 units in Singapore with total sales value of S$4.3bn in FY21. This was 66% and 131% higher than FY20's 1,318 units and total sales value of S$1.8bn and surpassed our FY21 sales estimate of 1.6k units. This was attributed to strong take-up at two projects, Irwell Hill Residence and CanningHill Piers, which were launched in FY21 and are presently 77% and 86% sold.
  • However, due to higher land and development cost for newer projects, PBT margin for the development segment compressed from 23% to 22%.

Hotel segment turned EBITDA positive.

  • RevPAR jumped 49% y-o-y, with significant pick-up observed in 2Q/3Q21. Portfolio occupancy improved y-o-y from 38.6% to 51.0 %, widening gross operating margin from 3.7% to 21.8% (2019: 39%).
  • City Developments's hotels in US and Europe recovered faster than those in Asia and Australia which experience longer periods of lockdowns and restrictions. Hospitality EBITDA still 40% below 2019 levels. More recovery expected as travel returns.

Opportunistic divestment of Millennium Hilton Seoul and Tanglin Shopping Centre.

  • City Developments signed a Sale and Purchase Agreement (SPA) to divest Millennium Hilton Seoul for S$1.25bn on 24 Dec 2021. The sales was completed on 24 Feb 2022 with significant divestment gain of S$528.8mil to be booked in FY22.
  • City Developments also launched a public tender for Tanglin Shopping Centre in December 2021, which closed on 22 February 2022 with a top bid of S$868mil or S$2,769 psf ppr. City Developments owns 60% of NLA in this strata-titled property and we estimate this could unlock ~S$ 280mil in divestment proceeds for the group, which will be booked in FY22.

The Negative

Listing of UK commercial REIT delayed.

  • The listing of a UK commercial REIT, of which City Developments would be the co-sponsor, was intended for 2021 but did not materialise. The management intends to continue the listing process. While the delay in listing was a setback, occupancy of the two assets that will be injected into the REIT, 125 Old Broad Street and Aldgate House, has improved. This should strengthen the initial portfolio for the upcoming UK Commercial REIT.
  • As per our estimates, assuming a 20-25% stake for City Developments, the injection of 125 Old Broad Street and Aldgate House into a 38%-geared S$3.5bn S-REIT portfolio could unlock S$526-633mil for the group.


Healthy inventory levels allow for more conservative bidding

  • Three residential launches totalling 1,291 units are in the pipeline for 2022. City Developments also picked up two more sites which will add 1,048 units to the pipeline, bringing unsold inventory to 3,047 as at 31 Dec 2021. City Developments’s inventory levels are healthy, allowing it to be more selective and conservative when bidding for new sites. The site at Upper Bukit Timah Road was purchased in an off-market deal from Tan Chong Realty for S$126.3mil or S$603 psf and could yield 603 units.
  • On 26 Jan 2022, City Developments won the tender for the Jalan Tembusu GLS (government land sale) with a bid of S$589.9mil or S$1,302 psf, adding 640 units to the pipeline. Given the higher land prices and cost of construction, City Developments is aiming for margins of at least 10% for new projects.

Unlocking value through strategic redevelopments

  • City Developments entered into a put and call option agreement with Far East Hospitality Trust (SGX:Q5T) to acquire Central Square, a 99-year leasehold commercial and residential development, with a remaining lease tenure of approximately 72 years, for S$315mil.
  • Central Square is adjacent to City Developments's Central Mall. The purchase of Central Square is expected to be completed in Mar 22. The enlarged site, comprising Central Mall's office component, Central Mall conservation shophouses and Central Square, will be redeveloped under URA’s Strategic Development Incentive Scheme, yielding a GFA uplift of 67%, from 441,650 sq ft presently to 735,00 sq ft. The proposed mixed-use development will comprise commercial, hotel and service apartment components, subject to City Developments getting planning approval for residential use. Phased completion for this redevelopment is expected in 2027.
  • City House, which is located along Robinson Road and Cross Street, falls under the CBD Incentive Scheme, which could potentially unlock additional GFA. Similar to the Fuji Xerox redevelopment, the redeveloped site could benefit from GFA uplift if City Developments decides to undertake the redevelopment to convert the assets into a mixed-use development. The management is currently evaluating the merits of undertaking a redevelopment and has not announced any plans presently.

Distribution in Specie hints at more active recycling of hospitality assets

Maintain BUY and RNAV-based target price of S$9.19

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2022-03-14
SGX Stock Analyst Report BUY MAINTAIN BUY 9.190 SAME 9.190