• Maintain NEUTRAL, new Target Price of SGD9.20, 9% upside with 2.4% FY19F yield.
• City Developments (CDL)’s 3Q results are broadly in line. While its Singapore residential sales momentum has stayed fairly steady despite cooling measures, this was achieved at the expense of margins. Its hotel operations were weak, impacted by higher opex.
• The recent acquisition of two commercial properties in London adds stability to recurring income and will help mitigate some of the expected slowdown in the property development segment.
• While valuations are cheap (trading at 45% discount to RNAV), the stock lacks strong re-rating catalysts.

3Q18/9M18 PATMI Rose 10%/25% Y-o-y

• City Developments (CDL)’s results are broadly in line, with 9M18 net profit accounting for 76% of our full-year forecast. PATMI growth for the quarter was underpinned by a strong performance from the property development segment in Singapore, China and Japan. Key projects contributing to the strong performance were New Futura and The Tapestry.
• In its overseas market, revenue was booked from Phase 2 of Hong Leong City Center (HLCC) in Suzhou, China and Park Court Aoyama The Tower in Tokyo, Japan.
• Geographically, Singapore accounted for 53% of 9M18 EBITDA, and the remainder came mainly from China, Japan and the UK.
• NAV/share rose 3.9% y-o-y to SGD10.23.

SG Residential – Steady Sales But Thinner Margins

• Post cooling measures, take-up rates at its newly-launched projects (The Jovell, South Beach Residences and Whistler Grand) have been fairly steady, at 20-67%. However, the slightly better sales came with lower margins, in particular for Whistler Grand – for which we expect margins to be at mid-single digits, at best.
• We cut our margin assumptions to mid-single digits for its upcoming projects – Amber Park, Handy Road site and Sumang Walk EC – as buyers have become much more selective and price-resistant post-cooling measures.
• YTD (Sep 2018), City Developments has sold 787 units with a total sales value of SGD1.8bn, with New Futura and The Tapestry being the key contributors.

Strengthening Its Recurring Income Portfolio

• City Developments (CDL) recently expanded its UK presence by acquiring two Grade-A commercial properties (Aldgate House and 125 Old Broad Street) for SGD1bn. The freehold properties come with long lease terms, mitigating some near-term Brexit concerns. The relatively low borrowing cost of ~2% will also help enhance their current passing yields of 4.7- 5%.
• Management noted that these assets have the potential to be transferred into a private fund or REIT. With low gearing of 23%, we do not rule out the possibility of further acquisitions of investment properties in the UK and China.

Hotel – a Mixed Bag

• The outlook for its listed hospitality subsidiary, Millennium & Corpthorne (M&C), remains challenging on supply growth, technology disruptions and macro-economic uncertainties. Amidst this, M&C has embarked on asset enhancements and asset repositioning to deliver value.
• YTD, revenue per available room (RevPAR) dropped 8.8% y-o-y (in reported currency terms), dragged by a weaker performance from its US, London and Singapore hotels. Opex, which rose 88% y-o-y, also had a bigger impact on the bottomline.

Share Buy-back

• City Developments (CDL) began buying back its stock in August. It has since bought 8.8m shares from the market at range of ~SGD8-8.88/unit.

Maintain NEUTRAL, Lower Target Price of SGD8.88

• We trim our RNAV estimate by 8% to SGD88.88, factoring in the lower margins and marking to market its listed M&C portfolio.
• Our discount to RNAV also ticked up by 5ppts to 88%, to take into account the recent changes in policy affecting Singapore’s residential segment, ie limiting the number of smaller units in the project, as well as the increasing macro-economic risks.
• Key catalysts are the potential privatisation of M&C, relaxation of cooling measures and strong AUM growth in its fund management business.
• A key downside risk is the introduction of additional property cooling measures further dampening sentiment.

Source: RHB Invest Research - 09 Nov 2018