• CITY DEVELOPMENTS LIMITED (SGX:C09)’s 2Q/1H EPS of 17.9/39.9 Scts makes up 30.6%/68% of our FY19 forecast, slightly above our expectations due to one-off gains from PPS2.
• Robust residential sales deepen earnings visibility while new investments increase development and recurrent income pipeline.
• We maintain our ADD call with a Target Price of S$10.66.

City Developments's 2Q Results Highlights

• City Developments reported a 37.5% y-o-y decline in 2Q19 revenue to S$850.4m while PATMI fell 26.4% y-o-y to S$162.4m.
• Drag from lower property development revenue, owing to a high FY18 base, was partly offset by one-off gains from unwinding Profit Participation Scheme 2 (PPS2) structure, higher rental income.
• City Developments's 2Q/1H EPS of 17.9/39.9 Scts make up 30.6%/68% of our FY19 forecast. The group has declared interim DPS of 6 Scts.

Robust Residential Sales in 1H

• 2Q19 property development PBT declined 63% y-o-y to S$100.3m due to timing of profit recognition with progressive contributions from The Tapestry and Whistler Grand compared to profit recognition from completed projects in the previous year.
• Nonetheless, City Developments achieved new sales of S$1.55bn for 1H19, 20.6% higher y-o-y, from Boulevard 88, South Beach Residences and Amber Park. It has rolled out Haus on Handy and Piermont Grand in 3Q and plans to launch Sengkang Grand Residence in 4Q. This is likely to continue to accrete to its forward billings visibility.

One-off Gains Boost Rental Income

• Investment property PBT surged to S$77.8m thanks to an S$43.3m gain from the group’s stake in PPS2 as well as rental income from Aldgate House and 125 Old Broad St in the UK. Its Singapore commercial and retail portfolio continues to be 92.1%/95.1% occupied.
• Asset enhancement works at Republic Plaza are largely completed and all retail and F&B units will be fully operational by end-Sep 19.

New Acquisitions Deepen Development and Recurrent Income

• City Developments has made strategic acquisitions and investments of S$587m YTD in Singapore, Europe and Australia. In addition, it is taking a 24% stake in Sincere Property Group as well as a 100% stake in Shanghai Hongqiao Centre P2 and announced a privatisation offer for the remaining stake in M&C it does not own.
• City Developments’s net debt to equity stands at 32% (including revaluation gains) and is within its optimal target of 50-60%. Management expects gearing level to remain within this optimal target post completion of Sincere and M&C acquisitions. It continues to deepen its development pipeline and build its recurrent income base.

Retain ADD

• We tweak our FY19-21F EPS post results and maintain our ADD rating with a Target Price of S$10.66, based on a 35% discount to RNAV. See attached PDF report for RNAV breakdown.
• Re-rating catalyst is a pick-up in the Singapore residential market while downside risks includes slow macro outlook due to ongoing trade war concerns as well as slow capital deployment.

Source: CGS-CIMB Research - 8 Aug 2019