Maintain BUY and SGD9.75 TP, 32% upside and c.4% yield. City Developments’ recent acquisition of St Katherine Docks (SKD) and Sofitel Brisbane are opportunistic moves, in our view, well supported by its healthy balance sheet position. Operationally, core earnings are expected to rebound this year from healthy residential sales and the hospitality sector recovery. Key catalysts are the unlocking of portfolio value via an asset spin-off into funds or REITs, divestments, and possible M&A. Valuation remains cheap at >50% discount to its RNAV.
Boosting its UK commercial portfolio for potential spin-off. CIT recently announced the purchase of SKD in central London from Blackstone for GBP395m (SGD636m), or c.GBP751 psf (SGD1,209 psf). SKD is a mixed-use estate fronting the River Thames and comprises c.0.5m sqf of Grade A office, F&B, retail, residential, as well as a marina with berths for up to 185 yachts. The freehold property is centrally located with good connectivity and has current occupancy of 90% and an overall Weighted Average Unexpired Lease Term (WAULT) of 8.2 years (to lease breaks) and 9.4 years (to lease expiries). Based on our estimates, the acquisition translates to an initial NPI yield of slightly >7%, which we believe sufficiently buffers in the weak near-term economic outlook in the UK. With this acquisition, the group now has a sizeable UK commercial portfolio of c.GBP1bn – management noted it could possibly be spun off into a private fund or REIT at the right time, and drive in its fund management strategy.
Maiden entry into Brisbane’s hospitality sector. The group also recently announced its plans to acquire Sofitel Brisbane Central, a 5-star hotel with 416 rooms from Brookfield Asset Management. The purchase will be made via a 50:50 JV with its NZ listed subsidiary Millennium & Copthorne Hotels New Zealand at price of AUD177.7m (SGD159.2m), or c.AUD427,000 per key. The acquisition is subject to government approval and is expected to be completed in 2H. Management had earlier guided that it would like to play a more active sponsor role for its listed hospitality trust, CDL Hospitality Trusts (CDREIT SP, NEUTRAL, TP: SGD1.25), by providing a good asset pipeline for potential acquisitions. Net gearing (including fair value on investment properties) post above transactions is expected to be at the c.60% level, which we deem as reasonable.
We revise FY23F-24F earnings by 1% and -3% by factoring in the latest acquisition and fine-tuning financing costs and margins. CIT announced that it has become the first company in South-East Asia to apply the two- pillar ESG disclosure framework that harmonises nine key ESG reporting standards and 14 UN Sustainable Development Goals. Overall, the group hasa high ESG score of 3.3 out of 4.0– as this score is three notches above our country median, we apply a 6% premium to derive our TP.
