• City Developments (CDL)'s 9M18 results are in line, with net profit of S$446.6m (+25% y-o-y) underpinned by strong development profits, which were offset by hotel, rental and other segments.
• CDL has done well in Singapore residential despite regulatory headwinds, and continues to make headway in building its recurring income base, such as its expansion into UK commercial assets.
• Maintain BUY with a raised RNAV-based target price of S$12.12 (previously S$12.00).

3q18 Results

Results broadly in line.

• City Developments (CDL) reported 9M18 net profit of S$446.6m (+25% y-o-y), accounting for 72.4% of our full-year estimates.
• The strong showing was underpinned by strong performance from the property development segment, which grew 83.5% y-o-y in pre-tax profits for 3Q18, driven by contributions from Singapore, China and Japan. However, 3Q18 group performance was dented by lower contributions from Hotel Operations (-50.6%), Rental Properties (-30.7%), and Others (-29.1%) in pre-tax profits.

Segmental performance, property shines.

• CDL's 9M18 development pre-tax profits grew by 86%, boosted by several projects, including New Futura, Park Court Aoyama The Tower, coupled with increased contributions from HLCC (which saw completion in May 18, and profits recognised for 264 units handed over) and The Criterion EC (which obtained TOP in Feb 2018) partially offset by lower contributions from Gramercy Park and Coco Palms.
• Hotel Operations saw a decline of 50.6% in pre-tax profits in 3Q18, due to the full closure of Millennium Hotel London Mayfair (at the beginning of Jul 18) for refurbishment work while still incurring certain fixed costs, lower contributions from Millennium Hilton Bangkok (undergoing phased refurbishment), closure of Dehevanafushi Maldives Luxury Resort in June 2018 for rebranding exercise to “Raffles” resort, but partly mitigated by contributions from M Social Auckland (re-opened in Oct 17).
• Lastly, rental properties suffered a 30.7% decline in 3Q18 pre-tax profits, mainly due to a S$30m gain recognised in Sep 17 for the disposal of an office building in Osaka).

Stock Impact

Singapore residential further challenged.

• Management noted that further to the slews of measures on 6 Jul 18, more guidelines have been imposed, such as the minimum average size for non-landed residential projects outside OCR to increase from 70sqm to 80 sqm, reduction of bonus GFA cap for private outdoor spaces from 10% to 7%. They clarified that the group is unaffected, as its acquired sites, such as Amber Park, West Coast Vale, Handy Road and Sumang Walk EC have all obtained Planning Permission.
• Management is also cognisant that buyers will adopt a wait-and-see approach, and are becoming more price sensitive and selective, which will impact sales volume. Despite the challenges, CDL is well-positioned, with a low unsold inventory (292 attributable units), as well as a diversified residential launch pipeline across EC, Mass Market, Mid-tier, High-end segments.
• Upcoming launches to watch out for include Amber Park in 1H19, Handy Road in 1Q19, and Sumang Walk (EC) in 2Q19, Sengkang Central in 4Q19, and Boulevard 88.

Singapore office remains buoyant.

• Management cited the URA statistics, which saw overall rental for office space increase 2.5% in 3Q18 (vs 1.6% increase in 2Q18), marking the sixth consecutive quarter of office rental growth. The Group’s office portfolio continued to enjoy healthy occupancy of 91.5% (vs island wide occupancy of 88%).
• Republic Plaza‘s S$70m asset enhancement initiatives (AEI) are expected to complete by 2H19, which will allow the group to tap on the improving office sentiment.

Exploring more opportunities in Australia.

• CDL continues to be upbeat about Australia (despite recent softness), given the longer-term prospects for its economy and positive population growth. The Group’s JV has a 476-unit Ivy and Eve residential project in Brisbane (completed in Feb 18), and this has achieved settlement.

UK update.

• CDL’s Teddington Riverside 240-unit development is on track for completion in 1Q20, and has previewed its Phase One (comprising the five-storey Carlton House and seven-storey Shepperton House) in the UK, Hong Kong and Singapore. 
• CDL’s other projects, Chesham Street in Belgravia (6 units), Hans Road in Knightsbridge (3 units) are fully fitted and are being marketed, and 90-100 Sydney Street in Chelsea (9 units) is on track to completion by 4Q18.

Expansion into UK commercial assets.

• During the quarter, CDL acquired the Aldgate House for £183m/£867psf (S$328m/S$1,555psf), and 125 Old Broad Street for £385m/£1,170psf (S$687m/S$2,088psf). Both properties are expected to see positive rent reversions. About 45% of the office rents at Aldgate House are below market rents in the Aldgate area. For 125 Old Broad Street, passing rents are still 25% below prime average rents in City of London.
• In the UK, CDL also owns the Development House Office building, a freehold, 28,000sf property at Leonard Street, Shoreditch district which will be redeveloped into a nine-storey building with over 72,000sf NLA.
• Management expressed confidence in the long-term fundamentals of London, and sees Brexit as an opportunity to acquire assets with deep value at attractive pricing and yields, via off-market transactions. They also guided for office rental growth into 2021, bolstered by stronger demand and tightening of both existing new supply and existing office stock.

Earnings Revision/rsk

• We raise our 2018-20 net profit forecasts by 1-4%, factoring in contributions from Aldgate House and 125 Old Broad Street.

Valuation / Recommendation

• Maintain BUY with a raised target price of S$12.12 (previously S$12.00), pegged at a 15% discount to our revised RNAV of S$14.26/share. We have raised our RNAV by 1%, factoring in recent acquisitions.

Share Price Catalyst

• Accretive acquisitions or investments and a continued build-up in recurrent earnings.

Source: UOB Kay Hian Research - 09 Nov 2018