Core earnings disappointed. Boosted by net divestment gains of SGD42.0m, CDL reported a marginal 1.8% YoY growth and 2.3% QoQ decline in its 3Q12 PATMI to SGD134.5m. Excluding the gains, we estimate that underlying profits would have shown declines of 38% YoY and 39% QoQ respectively. This is below expectations, due mainly to the timing of profit recognition. With growing headwinds in the hotel business and increased exposure to the mass market segment, we maintain our SELL recommendation.

Drop in residential earnings. While the property development segment remains the biggest contributor of pre-tax profits at 35%, earnings in the segment fell by 41% YoY to SGD76.5m. According to accounting rules, profits from the fully-sold ECs Blossom Residences and The Rainforest cannot be recognized until full completion.

Asian hotel RevPAR flatlining. On a like-for-like basis, M&C reported a 7.9% increase in its 3Q12 operating profit to GBP39.8m on the back of a 1.7% YoY growth in Group RevPAR, led by its hotels in London. However, the weak economic conditions are starting to bite in Singapore and the rest of Asia, where RevPARs have fallen in 3Q12. We expect operating conditions to remain challenging for the rest of the year, but M&C’s robust balance sheet and active asset management strategy should put them in relatively good stead.

Busy replenishing landbank. CDL was recently awarded an EC site at Sengkang West for SGD135m, or SGD296 psf ppr. This takes CDL’s acquisitions from the GLS programme to four this year, at a total attributable land cost of SGD689m and combined attributable GFA of 1.5m sq ft. However, on the back of the latest measures capping home loans at 30 years, we expect sales in the mass market segment to be less robust in 2013 with the marginal buyers staying out of the market.

Maintain SELL. We lower our target price to SGD9.70 as we ascribe a 25% discount to RNAV (previously 20%) given the headwinds faced by M&C and possibly its mass market launches in FY13. Maintain SELL.

Source: Maybank Kim Eng Research - 15 Nov 2012