• Maintain NEUTRAL with new Target Price of SGD10.50 from SGD9.20, 0% upside.
• CITY DEVELOPMENTS (SGX:C09)'s 3Q19 results (excluding impairments) were in line. Key takeaways are the successful privatisation of M&C hotels and good take-up at Singapore residential launches.
• A key concern remains on the impact of its UK portfolio from Brexit uncertainty and regulatory risks.
• While valuations are reasonably attractive at > 40% discount to RNAV, the stock lacks a strong catalyst.

Transformation of M&C – the Key Catalyst to Watch Out for

• As anticipated City Developments succeeded in its bid to privatise Millennium & Copthorne (M&C) hotels, with the stock delisted from the London Stock Exchange on 11 Oct 2019.
• The successful transformation of hotel operations will be a key re-rating catalyst for City Developments, where EBITDA contribution has been on a declining trend (YTD 2019: SGD137m, vs 9M18: SGD208m and 9M17: SGD256m) due to weaker operational performance, impairments and closure for asset enhancement.
• In the near term, we expect City Developments to pump in significant capex ( > SGD100m) to better reposition its ageing hotel assets, which should benefit it in long term. Global RevPAR (constant currency) for its hotels improved 4.3%/1.6% y-o-y in 3Q/9M19 respectively.

Good Take-up at Singapore Residential Launches

• YTD, six residential projects were launched in Singapore, which saw healthy sales take-up of 15-55% of total units. 9M19, City Developments sold about 1,130 units (+44% y-o-y) and achieved a higher sales value of SGD2.6bn (+66% y-o-y) providing good earnings visibility. Management earlier guided margins for high-end projects to be > 20% and low teens for mass to mid-end developments.
• The take-up of its China projects has also been fairly steady with 420 units sold – total sales value of CNY1.4bn (SGD269m).
• Upcoming Singapore residential launch to watch out for is the Sims Drive site (JV with Hong Leong Holdings) in 1Q20.

Fund Management Slowly Gaining Traction

• City Developments obtained its Capital Markets Services license from the Monetary Authority of Singapore paving the way to set up a private fund and/or REIT and accelerate its fund management plans. City Developments had earlier acquired 50% manager stake in SGX-listed IREIT GLOBAL (SGX:UD1U) – currently it holds 12.6% stake in the REIT.

Asset Enhancements

• Republic Plaza’s SGD70m AEI was completed in Sep 2019 with committed occupancy of > 90% and rental 10% higher than pre-AEI rental. Other AEI plans include upgrading works at City Industrial Building and Jungceylon retail mall in Phuket.
• Management expects high single-digit ROI from asset enhancement works.
• Gearing post recent acquisitions and AEIs still remains comfortable at 43% (FY18: 31%).

Earnings and RNAV Adjustment

• We revise our FY19F-21F net profit by 6- 12% to factor in the M&C privatisation. Our RNAV is also lifted up by 14% as we now use book value of M&C instead of mark to market value of shares.

Source: RHB Invest Research - 14 Nov 2019