• City Developments' FY18 net profit rose 7% y-o-y largely from property development, newly acquired properties and divestment gains, offset by impairment losses. 
• Launching 2,400 units in FY19. 
• Declared final dividend of 14 Scts (flat y-o-y); FY18 total DPS of 20 Scts vs 18 Scts in FY17. 
• Actively seeking potential acquisitions to achieve 10-year recurring EBITDA and AUM targets. 

Maintain HOLD; Lower Target Price at S$9.50

• We maintain our HOLD rating on City Developments Limited (SGX:C09) and Target Price of S$9.50.
• Although the shares are trading at attractive valuations (at close to 1.5SD below historical P/NAV average), we see limited catalysts for the stock and sector given expectations of a property market slowdown which historically implies that City Developments shares will likely be trading in a range.

Where We Differ

• Negative sentiment to hit Singapore’s developer with the largest unsold inventory. Given the weakened sentiment in Singapore property, coupled with the group having the largest inventory of units for launch, we believe there could be limited positive catalysts.
• In addition, the margins of units from the land bank acquired in late 2017-2018 could be impacted given limited ability to raise property prices following a turn in sentiment.

Potential Catalyst

• Property sales remain strong despite the change in sentiment; successful launch of its fund management platform.

Key Risks to Our View

• Non-completion of privatisation. The inability to complete the privatisation exercise on M&C could limit potential upside to RNAV.

What's New - A Good Harvest

FY18 net profit grew 7% y-o-y largely from property development (Singapore, Japan and China) and higher divestment gains; offset by impairment losses.

• City Developments' FY18 net profit grew 7% y-o-y to S$557m largely due to higher contributions from property development (+33% y-o-y), contributions from recently acquired office buildings in the UK and higher divestment gains totaling S$41m in FY18 (S$12m on disposal of a vacant shophouse plot at Jalan Besar and S$29m by CDL Hospitality Trusts (SGX:J85) in 1Q18) vs S$30m in 9M17. This is offset by lower contributions from the hotel operations (PBT -73% y-o-y) impacted by impairment losses and closure of hotel for refurbishments.
• City Developments' 4Q18 net profit fell 55% y-o-y to S$78m mainly due to impairment losses of S$114.2m for hotels and two small-scale development projects in Central London which could be leased out. All segments recorded lower contributions except rental properties with contributions from recently acquired investment properties in UK.
• City Developments' net gearing ratio stood at 31% as at end- 2018. Although the gearing has increased from a low of 9% in FY17, the net gearing ratio at 31% is still low and provides ample room to grow AUM.
• Declared final and special dividend of 14 Scts per share (flat y-o-y). Total FY18 dividend (including special interim dividend) was 20 Scts vs 18 Scts per share in FY17.

Property division.

• FY18 revenue rose 24% y-o-y mainly due to
  1. the lump sum recognition from sale of New Futura (93% sold as at 17 February 2019) which had completed,
  2. The Criterion EC upon completion in February 2018,
  3. South Beach Residences which had completed (28% sold including its S$26m penthouse),
  4. projects undergoing construction such as The Tapestry (67% sold) and The Jovell (12% sold), and
  5. its overseas properties from recognition upon completion of Hong Leong City Centre (HLCC) Suzhou phase 2 (66% sold) and the group’s 20% stake in the development of Park Court Aoyama The Tower, Tokyo (to date, 148 out of 160 units have been handed over).
• Similarly, PBT increased 35% y-o-y, mainly from the lump sum recognition of the development projects above. PBT margin improved marginally to 29% vs 27% in FY17.

Hotel operations.

• FY18 revenue fell 1% y-o-y mainly impacted by:
  1. hotel closures for refurbishment/rebranding exercise; Millennium Hotel London Mayfair (closed from July 2018; expected completion by 1Q19), Millennium Hilton Bangkok (impacted by refurbishment) and Dehevanafushi Maldives Luxury Resort (closed from June 2018 for rebranding), and
  2. some unfavourable forex impact, mitigated by contributions from new hotels Millennium New Plymouth NZ (acquired in March 2018) and M Social Auckland (re-opened in October 2017).
• However, PBT fell 73% y-o-y, mainly due to impairment losses, higher financing costs and full closure of the Mayfair hotel for refurbishments (GBP12m operating profits impact). In 4Q18, S$94.1m of impairment losses were recorded mainly for hotels in the US.

Rental properties.

• FY18 revenue grew 3% y-o-y but PBT grew 18% y-o-y supported by higher divestment gains, totalling S$41m vs S$30m in FY17 from sale of an office building in Osaka.
• The divestment gains in FY18 comprised S$29m from divestment of Mercure Brisbane and Ibis Brisbane by CDL Hospitality Trusts and S$12m from sale of a vacant shophouse plot at Jalan Besar in 3Q18.

Outlook

Residential – Singapore sales volume fell 5% y-o-y to 1,113 units while sales value grew 14% y-o-y; targets to launch another 2,434 units in FY19.

• FY18 property sales volume in Singapore fell 5% y-o-y to 1,113 units while sales value rose 14% y-o-y to S$2.2bn due to higher-priced products.
• Sales volume was largely led by New Futura (93% sold as at 17 February 2019 at ASP of S$3,500psf), The Tapestry (67% sold at ASP of S$1,350psf), Whistler Grand (36% at ASP of S$1,380psf) and the Jovell (14% sold at ASP of S$1,250-1,300psf). In addition, The South Beach Residences sold 53 units (28%) including the 6,728 sqft super penthouse sold for S$26m. We believe this is a commendable performance, although the project was launched after new cooling measures were implemented.
• Five upcoming launches in FY19 with a total of 2,434 units expected to be launched in FY19:
  1. Boulevard 88 (154 units) in March 2019,
  2. Amber Park (592 units) likely in April 2019,
  3. Handy Road (188 units) in 1H19,
  4. Sumang Walk (EC; 820 units) in 2H19, a project that management expects to be the best selling for the group this year, and
  5. Sengkang Central (680 units) in 2H19.
• In China, City Developments sold 153 units and 14 villas in FY18. Both projects in Chongqing, which a partial stake was divested to Vanke, were launched in May/December 2018 and have achieved 39% and 12% sales take-up.
• City Developments continues to market its UK residential properties in Belgravia and Knightsbridge. The show units for Phase 1 of Teddington Riverside are available for viewing, while Chelsea is on track to complete by 1Q19. Due to the introduction of ABSD in UK and the political uncertainty surrounding Brexit, the group is exploring the option of renting out some of its completed residential properties..

Commercial properties – active in potential acquisitions to achieve 10-year recurring EBITDA and AUM targets

• In Singapore, City Developments' office and retail properties currently have 91.3% and 95.1% occupancy. Approximately 17- 19% of its office portfolio is expiring in FY19-21 which allows it to ride on the office rent uptrend as supply falls off.
• Similarly, the AEI on Republic Plaza is expected to complete by 2H19 and could ride on the rising office rents when the AEI completes. The newly refurbished 173-unit Le Grove Servied Residences on Orange Grove Road has continued to perform above expectations with occupancy crossing 85% in January 19, after six months of opening.
• In September/October 2018, City Developments acquired two office buildings in London; Aldgate House and 125 Old Broad Street, both are currently under-rented with potential for positive rental reversions. Management shared that 24% of the leases at 125 Old Broad Street property is expiring in FY19, of which more than 50% of the tenants have agreed to renew. New rents could improve to GBP70 psf p.a. – GBP80 psf p.a. from current rents of GBP55 psf p.a. – GBP60 psf p.a., giving a potential boost to rental income in FY19/20. For Aldgate House, management is looking at AEI potential to increase its NLA and F&B offerings.
• In China, the Hong Leong Plaza Hongqiao comprises five office towers with approval for strata-titled units which will be operational by 2Q19. Potential tenants in the pipeline include serviced apartment operators and medical care service providers. Distrii, the master tenant at The Yaojing International moved in in January 2019.
• In line with its focus to expand and achieve its 10-year target of S$900m recurring EBITDA, management will be more active in the acquisition front.

Hotel – RevPAR (on constant currency) fell marginally, partially impacted by closures/refurbishments

• City Developments' RevPAR fell 1.5%. On constant currency basis, the group’s RevPAR improved 0.7% y-o-y. Excluding the impact of acquisitions, closures and refurbishments, RevPAR increased 2.4% y-o-y.
• On a constant currency basis, RevPAR was up for most locations led by Australasia (+6.4%), Asia (+1.7%) and US (+2.1%) except Europe (-4.5%) mainly due to London (-7.4%).
• UK performance was partially impacted by the closure of Millennium Hotel London Mayfair for refurbishment (expected completion by 1Q19), offset by contributions from newly acquired hotels.

Updates on PPS Structures

• Management is exploring various options as the PPS structures expire in FY19-20.
  • PPS2 is at the most advanced stage to close the fund as two of the assets (Manulife Centre and Central Mall) have been divested by the fund. Gains on divestment of Manulife Centre will be recognised in 1Q19. Central Mall, which City Developments had repurchased, will have redevelopment potential.
  • PPS1, which comprises S$1.5bn Quayside Collection in Sentosa, could be extended. However, management is exploring various options on W Hotel including potential divestment.
  • PPS3 owns the S$1.0bn 156-unit luxury residential, Nouvel18 and is looking for a good opportunity to relaunch the project.

Maintain HOLD; Lower Target Price of S$9.50

• We maintain our HOLD rating and Target Price of S$9.50.
• The target price is based on 40% discount to RNAV. It is currently trading at 0.8x FY19F P/NAV, at close to 1.5SD below the historical average traded during the last property cycle (FY13- 17).
• While City Developments' share price is at attractive valuations which implies that the potential downside risks from the recent implementation of new cooling measures is limited, we see limited catalysts for the stock and sector given expectations of a property market slowdown which historically implies that City Developments' share price will likely be trading in a range.

Source: DBS Research - 22 Feb 2019