SG: City Developments Limited (CIT SP) Property - Prudent to Take Profit

Price Target: $10.30 | SELL | Downside 13%

Core profits in line. CDL reported a 2Q12 PATMI of SGD137.7m and a 1H12 PATMI of SGD294.5m (-38% and -42% respectively). Excluding divestment gains, we estimate that core 1H12 PATMI actually declined by a gentler 6% YoY to SGD257.3m, in line with expectations. The stock has already risen by 34% YTD. We are downgrading CDL to SELL, preferring re-entry at SGD9.37 for a 10% upside.

EC profits to be recognized in 2014-2015. As with previous quarters, property development was a major earnings contributor, accounting for 47% of CDL’s 1H12 PBT. Profits from several projects have yet to feature in the bottom-line, including H2O Residences and The Palette. Profits from its two EC projects, Blossom Residences and The Rainforest, can only be recognized upon completion of construction, which we estimate to be in 2014 and 2015 respectively.

Fewer launches likely in 2H12. The Group sold 1,299 units in 1H12, mainly from the ECs and Bartley Residences. That, however, accounted for just 8% of the industry-wide total sales of 16,070 units in 1H12. Looking ahead, the site at Alexandra Road (508 units) could be launch-ready by 4Q12, while Pasir Ris Parcel 5 (912 units) beside The Palette is slated for launch either end-2012 or early 2013.

M&C warns of slower days ahead. Millennium & Copthorne reported a 29% YoY growth in its headline operating profit in 2Q12 (+27% YoY for 1H12). RevPAR in London grew by 4.3% in 1H12 while Singapore enjoyed a 6.1% growth in RevPAR on a like-for-like basis. However, management warned of evident signs of softening due to the global economic malaise. Nevertheless, M&C has a very strong balance sheet and is also seizing the opportunity to reposition/refurbish several key hotels to drive future RevPAR growth.

Re-enter at lower levels. CDL is currently trading at 0.93x P/RNAV - above its 5-year mean of 0.84x P/RNAV. With management now adopting a markedly cautious outlook, current valuations appear rich. We downgrade CDL to SELL, with a target price of SGD10.30 pegged at a 20% discount to RNAV.

Residential Hits and Misses

Focus on mass market projects. CDL’s two EC projects have been generally well-received. The 466-unit The Rainforest is already fully-sold since its launch in Jan 2012. The 602-unit Blossom Residences was launched in July 2011 and is now over 95% sold.

Some of its suburban projects have taken a much longer time to sell-through. For example, the 521-unit H2O Residences is still around 75% sold even though it was launched in Mar 2011. The 501-unit Hedges Park was launched a month later in Apr 2011, and has likewise achieved ~75% take-up to date. Bartley Residences, with an ASP of SGD1,250 psf, is currently ~50% sold, despite its proximity to Bartley MRT Station.

The new launches in the pipeline, namely the Alexandra Road site and Pasir Ris Parcel 5, are primarily catered to the mass market, where management feels buyers’ interest remain strong in the low interest rate environment.

High-end segment continues to be challenging. Management conceded that buying sentiments in the high-end segment have not recovered due to the global economic uncertainties. The Group has already shelved plans to launch projects such as the Lucky Tower site and Nouvel 18, which were originally planned to be launched in 2H11.

It also hopes to re-launch The Residences at W at Sentosa Cove some time after the W Singapore Sentosa Cove hotel opens in Sep 2012. Management believes that once the 240-room hotel opens, the value proposition of the Residences will be more visible. However, the Residences are unlikely to be re-launched before the year is up.Source: Maybank Kim Eng Research - 15 August 2012